Let Xtbe the exchange rate between dollar and Euro, i.e., 1 Euro has the value Xtdollars at time t. Consider 1-year dollar-denominated European call option on Euro with strike price $K, and 1-year euro-denominated European put on dollar with strike price 1/KEuro.

a. Write down both payoffs of these call and put options at t=1(year) in terms of X1and K1. (Call Payoff (in Dollar))

b. Explain why the long position of one share of the 1-year dollar-denominated Call on Euro is equivalent to the long position of K shares of 1-year Euro-denominated put on dollar.

c. Suppose X0 = 1.1, K = 1.1. If the call premium is $0.968, then what is the put premium?

d. Let us compare a 1-year dollar-denominated European put with a 1-year dollar-denominated European call with the same strike price $K. Let us denote the dollar-denominated interest rate by r, the Euro-denominated interest rate by rf (both rates are continuously compounded), and the call and put premiums by C(K, T) and P(K, T). Express the difference C(K, T) - P(K, T), using X0, rf, r, K, T... C(K, T) - P(K, T) = ? (you may use e^c in answer)