a. Show that a portfolio of two options can replicate a short forward. Follow the same steps as in the put-call parity derivation. - Use the two following options to construct the portfolio, but remember you will be long one option and short the other: EUR European options, maturity 3 months Premium Listed options Put Calle Strike price: USD/EUR 2.25 USD/EUR 0.001 USD/EUR 0.001 The forward rate is: F(USD/EUR) = USD/EUR 2.25. Assume two scenarios: one in which the spot rate at maturity is less than strike price, S(USD/EUR)=2.15, and one in which is higher than strike, S(USD/EUR) = 2.35. Show how the payoff at maturity of the portfolio coincide with those of the forward. b. Suppose now that you want to hedge your position of EUR 250 million, using this portfolio of options you just constructed. + Compute the cash flows in each scenario, i.e., S(USD/EUR) = 2.15 and S(USD/EUR) 2.35. a. Show that a portfolio of two options can replicate a short forward. Follow the same steps as in the put-call parity derivation. - Use the two following options to construct the portfolio, but remember you will be long one option and short the other: EUR European options, maturity 3 months Premium Listed options Put Calle Strike price: USD/EUR 2.25 USD/EUR 0.001 USD/EUR 0.001 The forward rate is: F(USD/EUR) = USD/EUR 2.25. Assume two scenarios: one in which the spot rate at maturity is less than strike price, S(USD/EUR)=2.15, and one in which is higher than strike, S(USD/EUR) = 2.35. Show how the payoff at maturity of the portfolio coincide with those of the forward. b. Suppose now that you want to hedge your position of EUR 250 million, using this portfolio of options you just constructed. + Compute the cash flows in each scenario, i.e., S(USD/EUR) = 2.15 and S(USD/EUR) 2.35