We have a European Put option for 10,000. The premium is 5 cents ($0.05) per euro. The exercise price is $1.30/ 1.00 and expiration is one year from today.

Suppose that the spot rate at expiration is $1.34/ 1.0000

1. Would you exercise the option? (2 pts)
2. What would be the exercise value of the option? (2 pts)
3. What is the break-even exchange rate for the put (disregarding time-value of money)? (5 pts)
4. Note that, usually, we disregard time-value of money when computing the break-even exchange rate for options. But assume you had to borrow at 10% to pay for the option. What would your break-even point be then? (6 pts)