The spot USD-EUR exchange rate is USD1.50/EUR. Consider a six-month (= 0.5 years) call option on the
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The spot USD-EUR exchange rate is USD1.50/EUR. Consider a six-month (= 0.5 years) call option on the EUR with a strike of USD1.50/EUR. Suppose the volatility of the exchange rate is 20%, the six-month interest rate on the USD is 1.5%, and the six-month interest rate on the EUR is 2.5%, both in continuously compounded terms.
(a) What is the Black-Scholes price of the call?
(b) If you had written this call on EUR 100 million, what would you do to delta-hedge your position?
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