Question
Assume you have invested in an American put option on USD/. The current exchange rate of the USD/ is 0.0088 and the strike price is
Assume you have invested in an American put option on USD/. The current exchange rate of the USD/ is 0.0088 and the strike price is 0.019 (both expressed as US dollars per unit of the (foreign currency)). The volatility of the exchange rate is 40% per annum. The domestic and foreign risk-free rates are 3% and 0.5%, respectively. The time to maturity of the option is 3 months. Required: a. What is the value of a three-month American put option given by a three-step binomial tree? Show all calculations for u, d, p, and (1-p) and the calculations related to option value at each node. b. Will the option be exercised at any node? Show all calculations.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started