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The three-month forward USD/euro exchange rate is 1.3000. The exchange rate volatility is 15%. A US company will have to pay 1 million euros in
The three-month forward USD/euro exchange rate is 1.3000. The exchange rate volatility is 15%. A US company will have to pay 1 million euros in three months. The euro and USD risk free rates are 5% and 4%, respectively. The company decides to use a range forward contract with the lower strike price equal to 1.2500. a. What should the higher strike price be to create a zero-cost contract? b. What position in calls and puts should the company take? c. How does your answer depend on the USD and the euro risk-free rate? Explain. d. How is the zero-cost range forward hedge different from a vanilla forward hedge
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