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1. A call option for euros has an exercise price of $1.05/ and a premium of $.03. A U.S. importer who will need to purchase

1. A call option for euros has an exercise price of $1.05/ and a premium of $.03. A U.S. importer who will need to purchase 20 million chooses to use this option to protect his firm against a weakening dollar.

a. Draw the payoff diagram for a long position in this call option.

b. If the spot exchange rate is now $1.10/, how much will it cost the importer to purchase 20 million?

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