Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The current value of the British pound is $1.40 and the volatility of the pound-dollar exchange rate is 15% per annum. Brian used the explicit
The current value of the British pound is $1.40 and the volatility of the pound-dollar exchange rate is 15% per annum. Brian used the explicit finite difference method to value an American call option with an exercise price of $1.62 and a time to maturity of one year. The risk-free rates of interest in the United States and the United Kingdom are 6% per annum and 9% per annum, respectively. By setting exchange rates intervals as 0.20 between 0.80 and 2.40 and time intervals as 3 months, he got the following grids. Which number is his answer? Stock Price Time to Maturity (Months) ($) 9 6 3 0 12 0.780 0.780 0.780 0.780 0.780 2.40 2.20 2.00 0.580 0.580 0.580 0.580 0.580 0.380 0.380 0.380 0.380 0.380 0.180 0.180 0.180 0.180 0.180 0.062 0.054 0.043 0.027 0.000 1.80 1.60 1.40 1.20 0.011 0.007 0.003 0.000 0.000 0.001 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.00 0.80 The current value of the British pound is $1.40 and the volatility of the pound-dollar exchange rate is 15% per annum. Brian used the explicit finite difference method to value an American call option with an exercise price of $1.62 and a time to maturity of one year. The risk-free rates of interest in the United States and the United Kingdom are 6% per annum and 9% per annum, respectively. By setting exchange rates intervals as 0.20 between 0.80 and 2.40 and time intervals as 3 months, he got the following grids. Which number is his answer? Stock Price Time to Maturity (Months) ($) 9 6 3 0 12 0.780 0.780 0.780 0.780 0.780 2.40 2.20 2.00 0.580 0.580 0.580 0.580 0.580 0.380 0.380 0.380 0.380 0.380 0.180 0.180 0.180 0.180 0.180 0.062 0.054 0.043 0.027 0.000 1.80 1.60 1.40 1.20 0.011 0.007 0.003 0.000 0.000 0.001 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.00 0.80
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started