The 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 4% and 3%, respectively. The company decides to use a range forward contract with the lower strike equal to 1.2500. (See textbook p.332 for the range forward, which is just another variation on option spreads.)

1. What should the higher strike be to create a zero-cost contract?

Report your answer rounded to four decimal places.

b. What position in calls and puts should the company take?

Select one:

a.

Sell a put and buy a call

b.

Buy a call and buy a put

c.

Sell a call and buy a put

d.

Sell a call and sell a put