Find the hedge ratio and use it to create a position in the, Financial Management

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Find the hedge ratio and use it to create a position in the

You have written a call option on £10,000 with a strike price of $20,000. The current exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to $4.00/£1.00 or decrease to $1.00/€1.00 (i.e. u = 2 and d = 1/u = 0. 5). The current interest rates are i$ = 3% and are i£ = 2%. Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position.

A. Buy £10,000 today at $2.00/£1.00

B. Enter into a short position in a futures contract on £6,666.67

C. Lend the present value of £6,666.67 today at i£ = 2%

D. Enter into a long position in a futures contract on £6,666.67

E. Both c and d would work

F. None of the above

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Financial Management: Find the hedge ratio and use it to create a position in the

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