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pishuonlain [190]
3 years ago
13

You are required to price a one-year, yen-denominated currency option on the USD. The exchange rate over the next year is modele

d using a forward binomial tree with the number of periods equal to 4. Assume that the volatility of the exchange rate equals 0.1. The continuously compounded risk-free interest rate for the yen equals 0.05, while the continuously compounded risk-free interest rate for the USD equals 0.02. What is the value of the so-called up factor u in the resulting forward binomial tree
Mathematics
1 answer:
shutvik [7]3 years ago
7 0

Answer:

The value of the so-called up factor is

u = 1.1618

Step-by-step explanation:

From the question we are told that

The number of period is n = 4

The volatility of the exchange rate is v  =  0.1

The continuously compounded risk-free interest rate for the yen is r = 0.05

The continuously compounded risk-free interest rate for the USD is R = 0.02

Generally the so-called up factor u is mathematically represented as

u =  e^{v + r}

=>       u =  e^{0.1 + 0.05}

=>       u =  e^{0.15}

=>       u = 1.1618

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Step-by-step explanation:

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