Consider a UK.-based IMporter of bicycles, Italian bicycles, who has a 160,000 payable due in one year. He wants to use options to hedge the cost of his payable. One-year at-the-money put and call options on 10,000 exist. The spot exchange rates are 1.00 = $1.120 and 1.00 = $1.400, which makes the spot cross rate 1.00 = 0.80. In the next period, the euro can increase in pound value to 1.00/1.00 or fall to 0.64/1.00. The interest rate in dollars is 's 6; the interest rate in euro is 1e* 5.00%; the interest rate in pounds 1s E = 7.10% 1. How many at-the-money puts (on 10,000 strike price in 8,000) should he sell today? HINT: You should be able to verify that your hedge "works" if the exchange rate at time 1 is E1.00/ or 0.64/ i.e. you should have the same cash flow in either state. Consider a UK.-based IMporter of bicycles, Italian bicycles, who has a 160,000 payable due in one year. He wants to use options to hedge the cost of his payable. One-year at-the-money put and call options on 10,000 exist. The spot exchange rates are 1.00 = $1.120 and 1.00 = $1.400, which makes the spot cross rate 1.00 = 0.80. In the next period, the euro can increase in pound value to 1.00/1.00 or fall to 0.64/1.00. The interest rate in dollars is 's 6; the interest rate in euro is 1e* 5.00%; the interest rate in pounds 1s E = 7.10% 1. How many at-the-money puts (on 10,000 strike price in 8,000) should he sell today? HINT: You should be able to verify that your hedge "works" if the exchange rate at time 1 is E1.00/ or 0.64/ i.e. you should have the same cash flow in either state