In this problem we use the lognormal approximation (see equation (11.14)) to draw one-step binomial trees from

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 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.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...