Question: In this problem we use the lognormal approximation (see equation (11.14)) to draw one-step binomial trees from the perspective of a yen-based investor. Use the

In this problem we use the lognormal approximation (see equation (11.14)) to draw one-step binomial trees from the perspective of a yen-based investor. Use the information in Table 23.4.

a. Construct a one-step tree for the Nikkei index.

b. Construct a one-step tree for the exchange rate (yen/dollars).

c. Use the trees to price Nikkei and dollar forwards. Compare your answers with those in Example 23.7.

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