1) The premiums of the 6-month call and put on a euro are $0.114 and $0.098, res

Question

1) The premiums of the 6-month call and put on a euro are $0.114 and $0.098, respectively, with a $0.94 strike. Dollar and euro interest rates are 7.0% and 6.0%, respectively. What spot exchange rate is implied by this data?

I know the answer should be A, please show me how to get that and what formulas to use

(a) $0.95 dollars per euro

(b) $1.00 dollars per euro

(c) $1.05 dollars per euro

(d) $1.10 dollars per euro

2)Put options with strikes of 70, 75, and 80 have option premiums of 4.00, 8.00, and 11.00, respectively. Given these information, in which way can you undertake an arbitrage?

I know the answer should be B, please show me how to get that so I can answer similar problems on my own.

(a) Buy a P(70), Short a P(75)

(b) Buy a P(70) and a P(80), Short two P(75)

(c) Short a P(75), Buy a P(80)

(d) It is impossible to make any arbitrage.

Explanation / Answer

1.

Call price = $0.114

Strike rate = $0.94

Present value of strike price at 7% = $0.94 / 1.0035 = $0.91

Price of put option = $0.098

Using put-call parity,

Call price + Present value of strike price = Price of put option + Spot rate

$0.114 + $0.91 = $0.098 + Spot rate

Spot rate = $0.95 per euro

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