In valuing currency options with the Black Scholes model, we saw that the risk free rate on the foreign currency was equivalent to the dividend yield when an individual stock or stock index was the underlying asset Discuss the appropriateness of this analogy What sort of transaction involving forei...

The Black Scholes model is derived by showing how a p ...

In valuing currency options with the Black-Scholes model, we saw that the risk-free rate on the foreign

Question:

In valuing currency options with the Black-Scholes model, we saw that the risk-free rate on the foreign currency was equivalent to the yield when an individual stock or stock index was the underlying asset. Discuss the appropriateness of this analogy. What sort of transaction involving foreign currency would be required to make this parallel exact?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...