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4. An Italian importer owes u10,000,000 in one year and is planning to use currency options to hedge his exchange rate risk exposure. The strike
4. An Italian importer owes u10,000,000 in one year and is planning to use currency options to hedge his exchange rate risk exposure. The strike price is X(/)=0.2524 for both calls and puts, and the current spot rate is So($/w)=0.2525. The spot rate next year is expected to be either Su(/w)=0.2641 or Sp(/)=0.2412. The interest rate in Italy is ie=0.50%, while the interest rate in Israel is in=0.75%. With this information find the option premium using both risk neutral probabilities and the replicating portfolio. Do you need to use a call or a put option? 4. An Italian importer owes u10,000,000 in one year and is planning to use currency options to hedge his exchange rate risk exposure. The strike price is X(/)=0.2524 for both calls and puts, and the current spot rate is So($/w)=0.2525. The spot rate next year is expected to be either Su(/w)=0.2641 or Sp(/)=0.2412. The interest rate in Italy is ie=0.50%, while the interest rate in Israel is in=0.75%. With this information find the option premium using both risk neutral probabilities and the replicating portfolio. Do you need to use a call or a put option
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