A call and a put option are written on 12.5 million with a strike price equal to the current exchange rate of 100/$ and the current discrete interest rates are R = 5% and R = 1%. Use one step recombining tree with u = 1.25. Assume that the one-step binomial tree is providing enough accuracy for hedging decisions.

An EU importer has a 100m payable due in one year who considers using options to eliminate exchange rate risk. Ignore time value in calculating the cost.

The future euro cost of an importer meeting this obligation using the option hedge if the future spot price is higher than the current spot rate is closest to?

Select one:

a. 0.8m

b. 2.2m

c. 1.2m

d. 0.2m