There is a European call option on the dollar with strike price of Kc = 94 pence per dollar and a European put option on the dollar with a strike price of Kp = 100 pence per dollar. Both have a notional N = 1 and both expire at date T. The current (date t) price of one dollar is St = 100 pence. The current prices of call option is 27.5 (55/2) pence and the price of the put option is 8.33 (25/3) pence. The sterling interest rate for borrowing and lending between dates t and T is 20% (1/5) and the corresponding dollar interest rate is 25% (1/4).

You buy the put option with strike price Kp =100 pence per dollar at date t. At the same time you buy 0.8 of a dollar which you invest in the US money market and you borrow 250/3 pence in the UK money market. Carefully explain the position you have at maturity date in one year and draw the combined payoff diagram.