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The price of a dollar denominated Eur call to buy one yen with a one year expiry is 0.0006. K=0.009. Dollar denominated interest is 5%.

The price of a dollar denominated Eur call to buy one yen with a one year expiry is 0.0006. K=0.009. Dollar denominated interest is 5%. The yen denominated interest is 1%. Both are continuously compounded. The exchange rate is 0.009 USD/Yen.

a) Find the cost of a dollar denominated Eur yen pur with no arbitrage.

b) Suppose the dollar denominated Eur yen put with K=0.009 costs 0.0004. Show the arbitrage.

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