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Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the...

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For a U.K. firm to hedge a €100,000 payable,

  • buy 10 call options on the euro with a strike in pounds sterling and buy 8 put options on the pound with a strike in euro.

  • sell 10 call options on the euro with a strike in pounds sterling.

  • buy 8 put options on the pound with a strike in euro.

  • buy 10 call options on the euro with a strike in pounds sterling.

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