Assume you have invested in an American call option on USD/¥. The current exchange rate of an American call option is 0.0091 and the strike price is 0.0058 (both expressed as US dollars per unit of the ¥ (foreign currency)). The volatility of the exchange rate is 40% per annum. The domestic and foreign risk-free rates are 3% and 1%, respectively. The time to maturity of the option is 3 months. What is the value of a three-month American call option given by a three-step binomial tree? 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?

Answer rating: 100% (QA)

To value the American call option on USD using the binomial tree method we need to follow these steps 1 Calculate u and d which are the up and down factors of the binomial tree respectively u et e0402... View the full answer