When moving from valuing an option on a non-dividend paying stock to an option on a currency
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Question:
When moving from valuing an option on a non-dividend paying stock to an option on a currency which of the following is true? Please give answer by showing the formula.
A. The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate in all calculations.
B. The formula for u changes.
C. The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate for discounting.
D. The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate when p is calculated.
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