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Q3) Consider a four-month European call option on the British pound. Suppose that the current spot exchange rate is 1.60 USD per 1 GBP and
Q3) Consider a four-month European call option on the British pound. Suppose that the current spot exchange rate is 1.60 USD per 1 GBP and has volatility of 14.1% per annum. The continuously compounded risk-free rate in the US is 8% per annum, and 11% per annum in Britain. Evaluate a European call option to buy one GBP for 1.60 USD, correct to 4 decimal places by using: a) A two-step binomial tree b) The Black-Scholes model
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