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 hedge ratio for a put option is closest to

Select one:

a. 0.44

b. -0.56

c. -0.44

d. 0.56