Q. 1 (Foreign exchange rate, 25 pts). Consider a one-period binomial model for a foreign exchange rate. At time 0, the exchange rate is So. At time T, the exchange rate is uSo with probability P (0.1) and dSo with probability 1 - p, where 0 -1 for the home country's currency and ry > -1 for the foreign country's currency. a. (5) What are the two assets of this market? Give careful definitions of their prices at times 0, T. b. (5) Give definitions of a portfolio (r, y) in this market and its values Vo Vy at times 0.1, respectively. C. (5) Give definitions of an arbitrage and the principle of no-arbitrage. Show that the principle of no-arbitrage holds if and only if d(1+r) -1 for the home country's currency and ry > -1 for the foreign country's currency. a. (5) What are the two assets of this market? Give careful definitions of their prices at times 0, T. b. (5) Give definitions of a portfolio (r, y) in this market and its values Vo Vy at times 0.1, respectively. C. (5) Give definitions of an arbitrage and the principle of no-arbitrage. Show that the principle of no-arbitrage holds if and only if d(1+r)