Question: Consider a down-and-out call option on a foreign currency. The initial exchange rate is 0.90, the time to maturity is two years, the strike price

Consider a down-and-out call option on a foreign currency. The initial exchange rate is 0.90, the time to maturity is two years, the strike price is 1.00, the barrier is 0.80, the domestic risk-free interest rate is 5%, the foreign risk-free interest rate is 6%, and the volatility is 25% per annum. Use DerivaGem to develop a static option replication strategy involving five options.

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A natural approach is to attempt to replicate the option with positions in a A European call option ... View full answer

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