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(iii) An Australian company has just bought some Canadian dollars. The current exchange rate between Australian dollar and Canadian dollar is CAD 1.00 = AUD

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(iii) 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 u,d,p*, 8t in your answers. (5 marks) Hint: you might need to think about how to calculate p* given that there are two interest rates (i.e. domestic and foreign). Also think carefully as to how to calculate dt. (iii) 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 u,d,p*, 8t in your answers. (5 marks) Hint: you might need to think about how to calculate p* given that there are two interest rates (i.e. domestic and foreign). Also think carefully as to how to calculate dt

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