Risk-neutral probability of the dollar strengthening

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Find the value of a call option written on €100 with a strike price of $1.00 = €1.00. In one period there are two possibilities: the exchange rate will move up by 15% or down by 15% (i.e. $1.15 = €1.00 or $0.85 = €1.00). The U.S. risk-free rate is 5% over the period. The risk-neutral probability of dollar depreciation is 2/3 and the risk-neutral probability of the dollar strengthening is 1/3.

Reference no: EM131515258

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