A financial institution has just sold a seven-month European call option on 1 million Japanese yen. Suppose that the spot exchange rate is 0.80 cent per yen, the exercise price is 0.81 cent per yen, the risk free interest rate in the United States is 8% per annum, the risk free interest rate in Japan is 5% per annum, the volatility of the exchange rate is 15% per annum.

(a) Calculate the delta of the financial institution s position.

(b) If the exchange rate increases by 0.02 cents per yen, what happens to the option position value of the financial institution?

(c) How does the financial institution create delta-neutral position?