The USD/euro exchange rate is 1.3000. The exchange rate volatility is 15%. A US company will receive 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 price equal to 1.2500.
(a) What should the higher strike price 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.