A Canadian equity index is 400. The Canadian dollar is currently worth 0.70 U.S. dollars. The risk-free
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A Canadian equity index is 400. The Canadian dollar is currently worth 0.70 U.S. dollars. The risk-free interest rates in Canada and the U.S. are constant at 6% and 4%, respectively. The dividend yield on the index is 3%. Define Q as the number of Canadian dollars per U.S. dollar and S as the value of the index. The volatility of S is 20%, the volatility of Q is 6%, and the correlation between S and Q is 0.4. Use DerivaGem to determine the value of a two year American-style call option on the index if
(a) It pays off in Canadian dollars the amount by which the index exceeds 400.
(b) It pays off in U.S. dollars the amount by which the index exceeds 400.
DividendA 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...
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a The value of the option can be calculated by setting and With 100 time steps the va...View the full answer
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