d) Now suppose that on day 1, the following instruments are available to the trader: (1)...

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d) Now suppose that on day 1, the following instruments are available to the trader: (1) European call options on the EUR, with a strike price of E$/ $0.05/, and; = 1.608 and a premium of (2) European put options on the EUR, with a strike price of Es/ $0.03/ = 1.608 and a premium of Both contracts are written on 125,000 and expire on day 5. The table below shows seven different scenarios that correspond to the expectation (as on day 1) of the spot exchange rate on day 5. Is it possible for the trader to make a profit by simultaneously buying both call and put options in any of the scenario(s)? Explain your answer and determine the exchange rates at which the trader may profit. (2 marks) Scenario 1 1.40 2 1.50 3 1.566 4 1.608 5 1.65 6 1.70 7 1.80 d) Now suppose that on day 1, the following instruments are available to the trader: (1) European call options on the EUR, with a strike price of E$/ $0.05/, and; = 1.608 and a premium of (2) European put options on the EUR, with a strike price of Es/ $0.03/ = 1.608 and a premium of Both contracts are written on 125,000 and expire on day 5. The table below shows seven different scenarios that correspond to the expectation (as on day 1) of the spot exchange rate on day 5. Is it possible for the trader to make a profit by simultaneously buying both call and put options in any of the scenario(s)? Explain your answer and determine the exchange rates at which the trader may profit. (2 marks) Scenario 1 1.40 2 1.50 3 1.566 4 1.608 5 1.65 6 1.70 7 1.80

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To determine if the trader can make a profit by simultaneously buying both call and put options we n... View the full answer