Construct six-step binomial tree for the price movement

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1. Consider a six-month American put option to sell one million units of a foreign currency. The current exchange rate is 0.79 and the strike price is 0.80 (both expressed as dollars per unit of the foreign currency). The volatility of the exchange rate is 12% per annum. The domestic and foreign risk-free rates are 5% and 2%, respectively.

a. Construct a six-step binomial tree for the price movement of the foreign currency

b. Using the six-step binomial tree in Part (a), price the American put option by the risk neutral valuation method.

Reference no: EM133069842

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