Question: Suppose the up and down prices for a foreign currency in a binomial model are $2 and $0.9, and the current exchange rate is $1.02.

  1. Suppose the up and down prices for a foreign currency in a binomial model are $2 and $0.9, and the current exchange rate is $1.02. The domestic risk-free rate is 5% (HPR) and the foreign risk-free rate is 2% (HPR). Calculate the risk-neutral probability of the up and down states.

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