Consider a 1-Year Call Option Written on £10,000 with an Exercise

Multiple Choice

Consider a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00. The current exchange rate is $2.00 = £1.00; The U.S. risk-free rate is 5% over the period and the U.K. risk-free rate is also 5%. In the next year, the pound will either double in dollar terms or fall by half (i.e. u = 2 and d = ½) . If you write 1 call option, what is the value today (in dollars) of the hedge portfolio?

A) £6,666.67
B) £6,349.21
C) $12,698.41
D) $20,000
E) None of the above