Problem Set 11 Unless otherwise stated, for Problems 5, 6, 7, 8 and 9 0 EU RJPY spot = 130.00 0 EUR rates = JPY rates = O, in perpetuity o Expiry for each forward contract = 3 months 0 Expiry for each option = 3 months 0 Notional for each option = EUR 100 million 0 Volatility surface is flat with (annualized) implied volatility = 10% o 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 9 Trade 9: At expiry knock-in put vs. at expiry knock-in call Leg 1: Buy EKI put: strike = 135, at expiry knockin barrier = ATM Leg 2: Sell EKI call: strike = 125, at expiry knockin barrier = ATM For (A), (B) and (C), sketch the following Payouts as a function of EURJPY spot at expiry A) Payout of Leg 1 i (B) Payout of Leg 2 (C) Payout of Trade 9 = Payout of Leg 1 + Payout of Leg 2 (D) Leg 1 can be replicated via a vanilla put and digital put. Determine: a. Strike and Notionalfor the vanilla put b. Strike and Notional for the digital put (E) Analogously, Leg 2 can be replicated via a vanilla call and digital call. Determine: a. Strike and Notional for the vanilla call b. Strike and Notional for the digital calll (F) Show that Trade 9 can be replicated via the ATM forward and digital put In this replicating portfolio, what is the Notional for the forward, and the digital put? (G) For ATM digital put, [Price in JPY/JPY Notional = 48%] Must the investor pay or be paid to do Trade 9