Question
Pricing Currency Options a. A currency worth $0.80 is expected to increase in value by 2% per period over the next two months. The domestic
Pricing Currency Options
a. A currency worth $0.80 is expected to increase in value by 2% per period over the next two months. The domestic and foreign risk-free interest rates are 6% and 8%, respectively. If the strike price is also $0.80, then use the binomial pricing theorem to price both the call and put options. Verify your answer using the put-call parity relationship.
b. The current exchange rate for a currency is 0.52, the volatility is 12%, and the domestic and foreign risk-free rate are 4% and 8% per annum respectively. If the strike price on an 8-month option is 0.50, use Black-Scholes to price the call and put options. Use put-call parity to verify your answer.
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