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4. Consider a currency future option on 10, 000 that will expire in a year. Assume that current spot exchange rate is So($/ ) =
4. Consider a currency future option on 10, 000 that will expire in a year. Assume that current spot exchange rate is So($/ ) = $1.3000/, and this option's strike price equals the one year forward rate Fi($/ ). We also assume that IRP holds during this period. The annual risk-free interest rates for GBP and USD are respectively 5% and 6%. After one year, the spot exchange rate will be either $1.2000/ or $1.4000/. Use both the binomial futures option pricing method and the risk neutral valuation method to calculate the price of this future option. (20') 4. Consider a currency future option on 10, 000 that will expire in a year. Assume that current spot exchange rate is So($/ ) = $1.3000/, and this option's strike price equals the one year forward rate Fi($/ ). We also assume that IRP holds during this period. The annual risk-free interest rates for GBP and USD are respectively 5% and 6%. After one year, the spot exchange rate will be either $1.2000/ or $1.4000/. Use both the binomial futures option pricing method and the risk neutral valuation method to calculate the price of this future option. (20')
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