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Calculate the estimated value of this put option for U.S. T-Bill rates of 0%, 1%, 2%, 4%, 5%, and 6%. Plot these values in a graph (by hand or using Excel), with put option values on the y-axis and U.S. T-bill rates on the x-axis.

Calculate the estimated value of this put option for U.S. T-Bill rates of 0%, 1%, 2%, 4%, 5%, and 6%. Plot these values in a graph (by hand or using Excel), with put option values on the y-axis and U.S. T-bill rates on the x-axis.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Question 3. Currency Option Pricing with Binomial Model 

On January 11, the spot exchange rate for the U.S. dollar is $0.70 per Canadian dollar. In one year’s time, the Canadian dollar is expected to appreciate by 20 percent or depreciate by 15 percent. We have a European put option on U.S. dollars expiring in one year, with an exercise price of 1.39 CND$/US$, that is currently selling for a price of $2.93. Each put option gives the holder the right to sell 10,000 U.S. dollars. The current one-year Canadian Treasury Bill rate is 2 percent, while the one-year U.S. Treasury Bill rate is 3 percent, both compounded annually. Treat the Canadian dollar as the domestic currency.         

 

  1. i. Calculate the estimated value of this put option for U.S. T-Bill rates of 0%, 1%, 2%, 4%, 5%, and 6%. Plot these values in a graph (by hand or using Excel), with put option values on the y-axis and U.S. T-bill rates on the x-axis.
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