Consider the following portfolio of European options on the euro: A short position in a call with strike price USD1.3/EUR and a long position in a put with the same strike price and same time to maturity.

1. Draw the payo prole of this option portfolio.

2. Form a portfolio consisting of domestic and foreign money-market instruments (de-posits/loans) that replicates the payo of the option portfolio.

3. Express the present value of the option portfolio (p0 c0) as the present value of the money market instruments which form the replicating portfolio.