Calculate the implied probability distribution

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Reference no: EM131239441

An exchange rate is currently 1.0 and the implied volatilities of 6-month European options with strike prices 0.7, 0.8, 0.9, 1.0, 1.1, 1.2, 1.3 are 13%, 12%, 11%, 10%, 11%, 12%, 13%. The domestic and foreign risk-free rates are both 2.5%.

Calculate the implied probability distribution.

Compare it with the implied distribution where all the implied volatilities are 11.5%.

Reference no: EM131239441

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