Calculate the value of a european put option to sell one

Reference no: EM133325718

Suppose that the spot price of the Canadian dollar is US$0.85 and that the Canadian dollar/US dollar exchange rate has a volatility of 4% per annum. The risk-free rates of interest in Canada and the United States are 4% and 5% per annum, respectively.

Question 1: Use a two-step binomial tree to calculate the value of a 4-month American call option to buy one Canadian dollar for US$0.88.

Question 2: Use the Black-Scholes formulas (adjusted for options on stocks paying known dividend yields) to calculate the value of a European put option to sell one Canadian dollar for US$0.85 in nine months.

Reference no: EM133325718

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