Posted: November 4th, 2015

Money, Financial Market and Banking

Money, Financial Market and Banking

A year ago, one-year interest rates in Brazil were on the order of 16%, those in

the U.S. were on the order of 1.25%, and the Brazilian real was worth about U.S.

$0.28. Now, the Brazilian real is worth about U.S.$0.34.

Intel stock is trading at $120 per share, and the company will not pay any

dividends over the next year. Consider an Intel European call option and a

European put option, both having an exercise price of $124 and both maturing in

exactly one year. The simple (annualized) interest rate for borrowing and lending

between now and one year from now is 3% for each 6 month period (6.09% per year).

Assume that there are no arbitrage opportunities. Is there enough information to

determine which option has the higher market value? If so, which option, the call

or the put, has higher market value? Explain your answer numerically.

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