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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
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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