dollar cost of his payable. 1-period at-the-money put and call options on 10,000 exist. The spot...

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dollar cost of his payable. 1-period at-the-money put and call options on €10,000 exist. The spot exchange rate is €1.00- Consider an American IMPORTER who has a €80,000 payable due in one year. He wants to use options to hedge the $1.20. In the next period, the euro can increase in dollar value to $1.25 or fall to $1.00. The interest rate in dollars is is 9.20%; the interest rate in euro is le 5%. a) (10 points) How many calls or puts or whatever should he buy or sell TODAY? At maturity? Write your answer here in this box. Be explicit. Please don't expect me to read your mind. 10 points) b) Verify that your hedge works if the exchange rate at time 1 is $2.00/€ or $1.00/€. dollar cost of his payable. 1-period at-the-money put and call options on €10,000 exist. The spot exchange rate is €1.00- Consider an American IMPORTER who has a €80,000 payable due in one year. He wants to use options to hedge the $1.20. In the next period, the euro can increase in dollar value to $1.25 or fall to $1.00. The interest rate in dollars is is 9.20%; the interest rate in euro is le 5%. a) (10 points) How many calls or puts or whatever should he buy or sell TODAY? At maturity? Write your answer here in this box. Be explicit. Please don't expect me to read your mind. 10 points) b) Verify that your hedge works if the exchange rate at time 1 is $2.00/€ or $1.00/€.

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