Question

Consider a European put option on a currency. The exchange rate is $1.20 per unit of the foreign currency, the strike price is $1.25, the time to maturity is one year, the domestic risk-free rate is 0% per annum, and the foreign risk-free rate is 5% per annum. The volatility of the exchange rate is 0.25. What is the value of this put option according to a one-step binomial tree?

Answer 1

6=0.25 X =$1.25 So = $1.20 Efd = 0% Eff=5% dt dee - Jat uze evet tadt = l. uz 1.284 d=0.778 (fd - Eff) t _ d 0.173 0.34 0.506 a- d 1.54 bo VP > 9336 p 0.316 po = px pu + (1-P pd = pxo +(-P) 0.31 put. = po = 208