Problem Set II 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 - Volatility surface is flat with (annualized) implied volatility = 10% o All \"Price\" references are in forward premium - \"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 5 Using a spreadsheet, calculate the following strikes (A), (B), (C) and (D) for a vanilla put: (A) ATM forward, ATM (B) 10 delta, 10d As per market convention, 10d refers to the strike for a vanilla put where delta = -0.10 (C) 25 delta, 25d (D) 50 delta, DN A straddle struck at Delta Neutral strike, DN, has no net delta at inception By no arbitrage, [Price of ATM call = Price of ATM put]. Furthermore, all higher order Greeks for ATM call and ATM put are also the same (E) Mechanically, does this imply Idelta of ATM ca||| = Idelta of ATM putl? Problem 6 Trade 6: Vanilla put vs. at expiry knock-in put Leg 1: Buy vanilla put: strike = ATM Leg 2: Sell EKI put: strike = 25d, at expiry knock-in barrier = 10d (A) Are the following assertions true? a. Price of Trade 6 > Price of ATM-25d vanilla put spread? b. Price of Trade 6 > Price of ATM-10d vanilla put spread? (B) Now assume that the volatility surface is not flat Can the answers to the following questions be determined without knowing the shape of the 3 month EURJPY \"volatilitysmile\"? a. Is Price of Trade 6 > Price of ATM-25d vanilla put spread? b. Is Price of Trade 6 > Price of ATM-10d vanilla put spread