Consider an option to buy £10,000 for €12,500. in the next period, if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.
on the other hand, the euro could depreciate against the pound by 20 percent.

big hint: don’t round, keep exchange rates out to at least 4 decimal places.

spot rates risk-free rates
s0($/€) $1.60 = €1.00 i$ 3.00%
s0($/£) $2.00 = £1.00 i€ 4.00%
s0(€/£) €1.25 = £1.00 i£ 4.00%

calculate the current €/£ spot exchange rate.

1. consider a two-firm industry. firm 1 (the incumbent) chooses a level of output qı. firm 2 (the potential entrant) observes qı and then chooses its level of output q2. the demand for the product is p 100 q, where q is the total output sold by the two firms which equals qi +q2. assume that the marginal cost of each firm is zero. a) find the subgame perfect equilibrium levels of qi and q2 keeping in mind that firm 1 chooses qi first and firm 2 observes qi and chooses its q2. find the profits of the two firms-n1 and t2- in the subgame perfect equilibrium. how do these numbers differ from the cournot equilibrium? b) for what level of qi would firm 2 be deterred from entering? would a rational firm 1 have an incentive to choose this level of qi? which entry condition does this market have: blockaded, deterred, or accommodated? now suppose that firm 2 has to incur a fixed cost of entry, f> 0. c) for what values of f will entry be blockaded? d) find out the entry deterring level of q, denoted by q1', a expression for firm l's profit, when entry is deterred, as a function of f. for what values of f would firm 1 use an entry deterring strategy?