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%