ICICI Bank has written a 90-day European option to sell USD 1,000,000 at an exchange rate of USD 1 = INR 47. e
current exchange rate is USD 1 = INR 47.40. e risk-free rate in India is 8%, the risk-free rate in the USA 4%, and
the volatility of the USD–INR exchange rate is 30%. e bank plans to hedge the option position by taking a position
in the USD–INR futures contract maturing in 90 days. What position should be taken in the futures and for what
amount?
Solution to Problem 18.3
Since the bank will sell U.S. dollars in the future, it will enter into a put option contract. e delta ...
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