Foreign Exchange Options1. Consider a call option on the British pound (BP) which represents the right to purchase 1,000 at the strike price of $1.30 per . The option will expire in one year. The current spot rate is $1.32 per . In the future, the spot rate may become $1.40 or $1.50 per . The annual risk-free interest rate is 6.0% in the US and 5% in the UK. A pure-discount British bond, that will pay 1,000 on the maturity date, is selling for 952.38 now.(a) If you buy a British bond, how many calls do you have to buy or sell to construct a risk-free hedge portfolio? What is the future dollar value of the hedge portfolio? (b) What is the fair price of this call option? (c) Suppose the call is trading for $20 per contract. Show how you can realize arbitrage profit and determine the profit. Assume you buy or sell one unit of British bond.2. Suppose there exists a put option that allows you to sell 1,000 at the strike price of $1.50 per . All the market conditions assumed in the previous problem remain valid.(a) Show how you can construct a risk-free hedge portfolio using a U.K. bond and the put options on . What is the future dollar value of the hedge portfolio? (b) Determine the fair price of this put option using the arbitrage argument.3. Mr. Kelvin just bought 3 contracts of put options and, at the same time, 6 contracts of call options on the Swiss francs (SF) in the Philadelphia Stock Exchange at the strike price of 65 cents per franc. Each option contract is for SF 62,500. The option will expire in three months. The put premium is 2.50 cents per SF and the call premium is 2.00 cents per SF.(a) Diagram the combined dollar profit schedule against the future spot exchange rate. (b) Compute and show the break even future spot exchange rates on the diagram. (c) What are the maximum possible loss and maximum possible profit in dollar terms?