An American company expects to receive 450,000 from sales in England at the end of 9...
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An American company expects to receive £450,000 from sales in England at the end of 9 months. The current exchange rate is $1.5/£. The company would like to guarantee that it will get at least this rate when it receives the pounds, so that it will receive at least $675,000. You are given: i) A two-period Cox-Ross-Rubinstein binomial tree is used to determine the price of options. ii) The continuously compounded risk-free rate in dollars is 4.3%. iii) The continuously compounded risk-free rate in pounds is 3.5%. iv) Relative volatility of the currencies is 0.2. Calculate the price of an option, in dollars, which will guarantee the current exchange rate at the end of 9 months. An American company expects to receive £450,000 from sales in England at the end of 9 months. The current exchange rate is $1.5/£. The company would like to guarantee that it will get at least this rate when it receives the pounds, so that it will receive at least $675,000. You are given: i) A two-period Cox-Ross-Rubinstein binomial tree is used to determine the price of options. ii) The continuously compounded risk-free rate in dollars is 4.3%. iii) The continuously compounded risk-free rate in pounds is 3.5%. iv) Relative volatility of the currencies is 0.2. Calculate the price of an option, in dollars, which will guarantee the current exchange rate at the end of 9 months.
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The price of the option is the amount of dollars that the company would need to pay to guarantee that it would receive at least 675000 from sales in E... View the full answer
Related Book For
Canadian Income Taxation planning and decision making
ISBN: 9781259094330
17th edition 2014-2015 version
Authors: Joan Kitunen, William Buckwold
Posted Date:
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