Assume you have invested in an American call option on AUD/USD. The current exchange rate of an
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Question:
Assume you have invested in an American call option on AUD/USD. The current exchange rate of an American call option is 0.79 and the strike price is 0.80 (both expressed as US dollars per unit of the AUD (foreign currency)). The volatility of the exchange rate is 12% per annum. The domestic and foreign risk-free rates are 2% and 5%, respectively. The time to maturity of the option is 6 months. What is the value a six-month American call option given by a three-step binomial tree? Show all calculations for u, d, p and (1-p) and the calculations related to option value at each node. Will the option be exercised at any node?
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