Estimate the probability that exchange rate in four months

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Reference no: EM131562527

An exchange rate is currently $0.8500 per unit of the foreign currency. The volatility of the exchange rate is 15%. Interest rate in $ is 5% while the interest rate in the foreign currency is 2%. Both rates are quoted per annum on a continuously compounded basis. Using the lognormal assumption, estimate the probability that the exchange rate in four months will be: a. less than or equal to $0.800, b. between $0.800 and $0.900, and c. greater than $0.900.

Reference no: EM131562527

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