In early February 2022, Dr. Coyote sold Dr. Li a put option on EUR with a strike price of USD 1.3000/EUR at a premium of USD 0.0300/EUR and with an expiration in August. The option is for EUR 100,000.

a. Draw the profit functions for Dr. C and Dr. L. Be sure to label all relevant information.

You may choose to put the two profit functions on one set of axes. (10 points)

b. By the middle of February, the exchange rate is USD 1.4500/EUR. Dr. L asks for your

advice on whether he should keep the option. Begin your answer with your thoughts on

whether this option has any value with explanation to support that view. Calculate Dr.L's

profit if, for whatever reason, he was to exercise the option. (5 points)

C. By the end of March, for some reason unknown to Dr. C, the exchange rate has changed to USD 1.1500/EUR and now Dr. C asks for your advice on what to do. Begin your advice with what Dr. C's profit would be if the option were exercised now. (5 points)

d. Dr. L did exercise the option at the end of March when the spot exchange rate is as given in part c. How much did he make (or lose)? What is his rate of return? (5 points)