The USD/euro exchange rate is 1.3000. The exchange rate volatility is 15%. A US company will have

Question:

The USD/euro is 1.3000. The 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 equal to 1.2500.
a. What should the higher strike be to create a zero-cost contract?
b. What position in calls and puts should the company take?
c. Show that your answer to (a) does not depend on interest rates provided that the interest rate differential between the two currencies, r –rf , remains the same.
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...