3. Option portfolio/strategies. Mr. Kelvin just bought 3 contracts of put options and, at the same time, 6 contracts of call options on the Swiss francs (SF) in the Philadelphia Stock Exchange at the strike price of 65 cents per franc. Each option contract is for SF 62,500. The option will expire in three months. The put premium is 2.50 cents per SF and the call premium is 2.00 cents per SF. (a) Diagram the combined' dollar profit schedule against the future spot exchange rate. (b) Compute and show the breakeven future spot exchange rates on the diagram. (c) What are the maximum possible loss and maximum possible profit in dollar terms? 4. Using options to build hedge portfolio. Consider a put option on the British pound (BP) which represents the right to sell 1,000 at the strike price of $1.50 per . The option will expire in one year. The current spot rate is $1.32 per . In the future, the spot rate may become $1.40 or $1.50 per . The annual risk-free interest rate is 6.0% in the US and 5% in the UK. A pure-discount British bond, that will pay 1,000 on the maturity date, is selling for 952.38 now. (a) If you buy a British bond, how many puts do you have to buy or sell to construct a risk-free hedge portfolio? What is the future dollar value of the hedge portfolio? (b) What is the fair price of this put option?