Suppose that an investor hedges against the exchange rate risk by writing one lot of put options on 625,000 British pounds. Consider that the current exchange rate is USD1.3500 per pound, exercise price is USD1.4000 per euro, the standard deviation is 30% per annum, the continuously compounded US and pound interest rates are 3% and 6.0% per annum respectively, and the expiration date is 12 months. Calculate the amount of option premium per lot that the investor will receive, and show the break-even point graphically. He fears the British pound to rise or fall?

Suppose that an investor hedges against the exchange rate risk by writing one lot of put options on 625,000 British pounds. Consider that the current exchange rate is USD1.3500 per pound, exercise price is USD1.4000 per euro, the standard deviation is 30% per annum, the continuously compounded US and pound interest rates are 3% and 6.0% per annum respectively, and the expiration date is 12 months. Calculate the amount of option premium per lot that the investor will receive, and show the break-even point graphically. He fears the British pound to rise or fall?

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