39 Hedging with straddles versus strangles. (See Appendix B.) Refer to the previous problem. Assume that Bach believes the cost of a long straddle is too high. However, call options with an exercise price of 0.105 euro and a premium of 0.002 euro and put options with an exercise price of 0.09 euro and a premium of 0.001 euro are also available on Moroccan dirham. Describe how Bach could use a long strangle to hedge its possible dirham positions.

What is the tradeoff involved in using a long strangle versus a long straddle to hedge the positions?