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2. An importer from Tel Aviv owes 1,500,000 in one year and is planning to use a perfect option market hedge. The strike price is
2. An importer from Tel Aviv owes 1,500,000 in one year and is planning to use a perfect option market hedge. The strike price is X(/)=3.75 for both calls and puts, and the current spot rate is Sow/)=3.73. The spot rate next year is expected to be either S (0/)=3.81 or S (1/6)=3.71. The interest rate in Israel is iz=1.75%, while the interest rate in the euro area is ie=1.25%. With this information show how to implement a perfect option hedge. Show in a diagram all the cash flows in tel and prove that this is indeed a perfect hedge. Compute the exchange rate implied by the option hedge. Make sure to show your work (as showed in class) and all your calculations. Round the dollar values to the 2nd decimal and the exchange rates to the 4th 2. An importer from Tel Aviv owes 1,500,000 in one year and is planning to use a perfect option market hedge. The strike price is X(/)=3.75 for both calls and puts, and the current spot rate is Sow/)=3.73. The spot rate next year is expected to be either S (0/)=3.81 or S (1/6)=3.71. The interest rate in Israel is iz=1.75%, while the interest rate in the euro area is ie=1.25%. With this information show how to implement a perfect option hedge. Show in a diagram all the cash flows in tel and prove that this is indeed a perfect hedge. Compute the exchange rate implied by the option hedge. Make sure to show your work (as showed in class) and all your calculations. Round the dollar values to the 2nd decimal and the exchange rates to the 4th
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