Consider a 9-month dollar-denominated American put option on British pounds. You are given that: (i) The current
Question:
Consider a 9-month dollar-denominated American put option on British pounds. You are given that:
(i) The current exchange rate is 1.43 US dollars per pound.
(ii) The strike price of the put is 1.56 US dollars per pound.
(iii) The volatility of the exchange rate is σ = 0.3.
(iv) The US dollar continuously compounded risk-free interest rate is 8%.
(v) The British pound continuously compounded risk-free interest rate is 9%.
Using a three-period binomial model, calculate the price of the put.
(A) 0.23
(B) 0.25
(C) 0.27
(D) 0.29
(E) 0.31
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A The method of constructing the binomial tree is not specified so we use a forward tree which ...View the full answer
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