1. Don works for the currency trading unit of a large bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Don do to act on his speculation?
a. Buy a put on the pound.
b. Buy a call on the pound.
c. Sell a put on the pound.
d. Sell a call on the pound.
2. According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso 10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.
a. overvalued; approximately 21%
b. undervalued; approximately 27%
c. undervalued; approximately 21%
d. overvalued; approximately 27%