Consider the following portfolio of European options on the euro: A short position in a call with strike price USD1.3/EUR and a long position in a put with the same strike price and same time to maturity.

1. Draw the pay off profile of this option portfolio.

2. Form a portfolio consisting of domestic and foreign money-market instruments (de-posits/loans) that replicates the pay off of the option portfolio.

3. Express the present value of the option portfolio (p0 − c0) as the present value of the money market instruments which form the replicating portfolio.

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1 The pay off profile of this option portfolio is At time t 0 the value of the po... View the full answer