A binomial tree with three month time steps is used to value a currency option The domestic and foreign risk free rates are 2 and 4 respectively The volatility of the exchange rate is 20 What is the risk neutral probability of an up movement What is the price of a six month European put option with a strike price of $1 01 when the exchange rate is $1 0 How would you hedge a long position in this option

Question: A binomial tree with three-month time steps is used to value a currency option. The domestic and foreign risk-free rates are 2% and 4% respectively.

A binomial tree with three-month time steps is used to value a currency option. The domestic and foreign risk-free rates are 2% and 4% respectively. The volatility of the is 20%. What is the risk neutral probability of an up movement?
What is the price of a six month European put option with a of $1.01 when the is $1.0? How would you hedge a long position in this option?

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