18. Suppose that the exchange rate is 1 dollar for 120 yen. The dollar interest rate is...

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18. Suppose that the exchange rate is 1 dollar for 120 yen. The dollar interest rate is 5%

(continuously compounded) and the yen rate is 1% (continuously compounded).

Consider an at-the-money American dollar call that is yen-denominated (i.e., the call permits you to buy 1 dollar for 120 yen). The option has 1 year to expiration and the exchange rate volatility is 10%. Let n = 3.

a. What is the price of a European call? An American call?

b. What is the price of a European put? An American put?

c. How do you account for the pattern of early exercise across the two options?

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Derivatives Markets Pearson New International Edition

ISBN: 978-1292021256

3rd Edition

Authors: Robert L. Mcdonald

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Question Posted: Jul 22, 2024 06:04 AM

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18. Suppose that the exchange rate is 1 dollar for 120 yen. The dollar interest rate is...

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Derivatives Markets Pearson New International Edition

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