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Question 3. Currency Uption Pricing with Binomial Model ((10 marks) On january 11. the soot exchange rate for the U.S. dollar is $0.70 per Canadian
Question 3. Currency Uption Pricing with Binomial Model ((10 marks) On january 11. the soot exchange rate for the U.S. dollar is $0.70 per Canadian dollar, In one year's time, the Canadian dollar is expected to appreciate by 20 percent or depreciate by 15 percent. We have a European put option on U.S. dollars expiring in one year, with an exercise price of 1.39 CNDS/US$, that is currently selling for a price of $2.93. Each put option gives the holder the right to sell 10.090 U.S. dollars, The current one-year Canadian Treasury Bill rate is 2 percent, while the one-year U.S, Treasury Bill rate is 3 percent. both compounded annually. Theat the Canadian dollar as the domestic currency What is the estimated value of this put option by using the binomial model? 15 marks] Calculate the estimated value of this put option for U.S. T-fill rates of 0%. 156. 24. 41, 5%%, and G16. Plot these values In a graph (by hand or using Excel), with put option values on the y aids and U.S. T bill rates on the x-adds. What can we conclude about the re sonship between foreign interest rates and foreign currency put option (2.5 marks) Calculate the estimated value of this put option for Canadian T Bill rates of 09%, 156. 21, 43%, 59%, and 5%. Plot these values In a graph (by hand or using Excell, with put option values on the y-aids and Canadian T bill rates on the w ads. What can we conclude about the relationship between domestic interest rates and foreign cumency put option values? (2.5 marks]
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