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Category > Business & Finance Posted 17 May 2017 My Price 12.00

The USD/euro exchange rate is 1.3000

The USD/euro exchange rate is 1.3000. The exchange rate volatility is 15%. A US company will receive 1 million euros in three months. The euro and USD risk-free rates are 5% and 4%, respectively. The company decides to use a range forward contract with the lower strike price equal to 1.2500.

(a) What should the higher strike price be to create a zero-cost contract?

(b) What position in calls and puts should the company take?

(c) Show that your answer to (a) does not depend on interest rates provided that the interest rate differential between the two currencies, r - rf , remains the same.

 

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Status NEW Posted 17 May 2017 08:05 AM My Price 12.00

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