3. [Range Forward Contract.] In this contract, the buyer agrees to purchase a foreign currency at price K2 if the spot currency value at T is less than K2, or at K1 if the value at T is greater than Ki, while paying the spot price itself if the spot falls in the range [K2, K K and K are set so that no money changes hands at time 0 'Ph "Towards a unified theory for autoregressions", Biometrika 74 (1987) 535-547. (a) In a particular such contract, the buyer selects price K,. You wish to find out what value K2 the seller should specify. You can't write down an explicit expression for this but you can give an equation which K2 must satisfy. Approach it as follows (G) Write a formula for the payoff of the contract to the seller, using general notation; (ii) value the contract at time 0, assuming the Black-Scholes market model; ii) then give an equation which K2 must satisfy. You can't solve this equation explicitly but it is easily solved numerically. (E.g., use "goal seek" in EXCEL.) (b) You enter into a range forward contract to purchase SUS1 in 1 year, setting K-1.40. The current spot price is SAUS1.25, the volatility of the SUS is 10% p.a., the Australian risk free rate is 4.75%, the US risk free rate is 3.75%. (i) What is the value of a European call with these parameters? i) What value should the counterparty specify for K2? 3. [Range Forward Contract.] In this contract, the buyer agrees to purchase a foreign currency at price K2 if the spot currency value at T is less than K2, or at K1 if the value at T is greater than Ki, while paying the spot price itself if the spot falls in the range [K2, K K and K are set so that no money changes hands at time 0 'Ph "Towards a unified theory for autoregressions", Biometrika 74 (1987) 535-547. (a) In a particular such contract, the buyer selects price K,. You wish to find out what value K2 the seller should specify. You can't write down an explicit expression for this but you can give an equation which K2 must satisfy. Approach it as follows (G) Write a formula for the payoff of the contract to the seller, using general notation; (ii) value the contract at time 0, assuming the Black-Scholes market model; ii) then give an equation which K2 must satisfy. You can't solve this equation explicitly but it is easily solved numerically. (E.g., use "goal seek" in EXCEL.) (b) You enter into a range forward contract to purchase SUS1 in 1 year, setting K-1.40. The current spot price is SAUS1.25, the volatility of the SUS is 10% p.a., the Australian risk free rate is 4.75%, the US risk free rate is 3.75%. (i) What is the value of a European call with these parameters? i) What value should the counterparty specify for K2