The spot USD-EUR exchange rate is USD1.24/EUR. Consider a one-month (= 0.083 years) put option on the
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The spot USD-EUR exchange rate is USD1.24/EUR. Consider a one-month (= 0.083 years) put option on the EUR with a strike of USD1.25/EUR. Assume that the volatility of the exchange rate is 12%, the one-month interest rate on the USD is 3.1%, and the one-month interest rate on the EUR is 3.7%, both in continuously compounded terms.
(a) What is the Black-Scholes price of the put?
(b) If you had written this put on EUR 10 million, what would you do to delta-hedge your position?
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