7.11. Suppose that a trader using the static options replication technique wants to match the value of
a portfolio of exotic derivatives with the value of a portfolio of regular options at 10 points on a
boundary. How many regular options are likely to be needed? Explain your answer.
7.12. Why is an Asian option easier to hedge than a regular option?
7.13. Explain why there are economies of scale in hedging options.
7.14. Consider a six-month American put option on a foreign currency when the exchange rate
(domestic currency per foreign currency) is 0.75, the strike price is 0.74, the domestic risk-free rate
is 5%, the foreign risk-free rate is 3%, and the exchange-rate volatility is 14% per annum. Use the
DerivaGem software (binomial tree with 100 steps) to calculate the price, delta, gamma, vega,
theta, and rho of the option. Verify that delta is correct by changing the exchange rate to 0.751 and
recomputing the option price.