An Australian company has just bought some Canadian dollars. The current exchange rate between Australian dollar and Canadian dollar is CAD 1.00 = AUD 0.79 and the strike price is CAD 1.00 = AUD 0.80 (both expressed as dollars per unit of foreign currency). The volatility of the exchange rate is 12% per annum. The Australian and Canadian interest rates are 3% and 5% per annum, respectively. Calculate the value of nine-month American call option on Canadian dollars using a three-step binomial tree. Clearly identify , , , in your answers.

Hint: you might need to think about how to calculate given that there are two interest

rates (i.e. domestic and foreign). Also think carefully as to how to calculate .