Problem Set 11 Unless otherwise stated, for Problems 5, 6, 7, 8 and 9 0 EURJPY spot = 130.00 0 EUR rates = JPY rates = 0, in perpetuity - Expiry for each forward contract = 3 months - Expiry for each option = 3 months - Notional for each option = EUR 100 million 0 Volatility surface is flat with (annualized) implied volatility = 10% 0 All \"Price\" references are in forward premium 0 \"Payout\" is ex premium, and occurs on delivery date 0 For vanilla options, all \"delta\" references correspond to Black Scholes delta (e.g., N(d1) for a vanilla call) Problem 7 Trade 7: One-touch vs. digital put Notional for each Leg = EUR 10 million Leg 1: Buy one-touch: barrier = 10d Leg 2: Sell digital put: strike = 10d (A) What is the minimum Payout of Trade 7? (B) What is the maximum Payout of Trade 7, in EUR and JPY? (C) Must the investor pay or be paid to do Trade 7? Problem 8 Trade 8: At expiry knock-out put vs. continuous knock-out put Leg 1: Buy EKO put: strike = ATM, at expiry knock-out barrier = 10d Leg 2: Sell KO put: strike = ATM, (continuous) knock-out barrier = 10d (A) What is the minimum Payout of Trade 8? (B) What is the maximum Payout of Trade 8, in EUR and JPY? (C) Must the investor pay or be paid to do Trade 8? (D) Sketch Payout of Trade 8 as a function of EURJPY spot at expiry. Why would an investor want to do Trade 8? (E) Is there a state of the world where Trade 7 pays out, but Trade 8 does not