.

Consider the following and solve.

Consider European calls and puts on a foreign currency. The spot rate is 125 and the exercise price is 120 (US cents per unit of the foreign currency). The risk-less rate in the US is 3.6% per annum and that in the foreign country is 2.4% per annum. The options have six months to maturity. If the call premium is 9.75 cents what should be the put premium? (10 Marks) Consider the same data. Assume that six months is being modelled by a two period Binomial tree. The periodic interest rate is 1/4th the annual rate. Every period the spot rate may go up by 20% or down by 20%. Value a European put using the Binomial model. (10 Marks)