One Australian dollar is currently worth $0.64. A 1-year butterfly spread is set up using European call options with strike prices of $0.60, $0.65, and $0.70. The risk-free interest rates in the United States and Australia are 5% and 4% respectively, and the volatility of the exchange rate is 15%. Use the Deriva Gem software to calculate the cost of setting up the butterfly spread position. Show that the cost is the same if European put options are used instead of European call options.

AppendixLO1