1. The current spot exchange rate is $1.33 = €1.00 and the three-month forward rate is $1.40 = €1.00. Consider a three-month put option on €62,500 with a strike price of $1.35 = €1.00. If you pay an option premium of $3,750 to buy this put, at what exchange rate will you break-even?
2. The price of Mattel, Inc stock is $13. The price of the futures contract on Mattel stock that expires in 6-months is $13.05. If the annualized risk-free rate is 3%, then how would you take advantage of this arbitrage opportunity? What should the price of the futures contract be if there are no dividends?