Assume that today is September 12. You have been asked to help a British client who is scheduled to pay €1,500,000 on December 12, 91 days in the future. Assume that your client can borrow and lend...

Assume that today is September 12. You have been asked to help a British client who is scheduled to pay €1,500,000 on December 12, 91 days in the future. Assume that your client can borrow and lend pounds at 5% p.a.
a. Describe the nature of your client’s transaction exchange risk.
b. What is the option cost for a December maturity and a strike price of ?L0.72/€ to hedge the transaction? The option premiums per 100 euros are ?L1.70 for calls and ?L2.40 for puts.
c. What is the minimum pound cost your client will experience in December?
d. Determine the value of the spot rate (?L/€) in December that makes your client indifferent ex post to having done the option transaction or a forward hedge if the forward rate for delivery on December 11 is ?L0.70/€.