Suppose that an index of Canadian stocks currently stands at 400. The Canadian dollar is currently worth
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Suppose that an index of Canadian stocks currently stands at 400. The Canadian dollar is currently worth 0.70 US dollars. The risk-free interest rates in Canada and the US are constant at 6% and 4%, respectively. The dividend yield on the index is 3%. Define Q as the number of Canadian dollars per U.S dollar and S as the value of the index. The volatility of S is 20%, the volatility of Q is 6%, and the correlation between S and Q is 0.4. Use DerivaGem to determine the value of a 2-year American-style call option on the index if:
(a) It pays off in Canadian dollars the amount by which the index exceeds 400.
(b) It pays off in US dollars the amount by which the index exceeds 400.
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