Tweet
Hi all,
I'm having some doubts concerning exchange rates and the last time I got a quick answer so I'm giving a try again.
Suppose this scenario:
Spot Rates Risk-Free Rates
$1.60=€1.00 3.00% (i$)
$2.00=£1.00 4.00 (i€)
€1.25=£1.00 4.00 (i£)
And the this scenario: In the next period, if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent. On the other hand, the euro could depreciate against the pound by 10 percent.
a) Draw the binomial tree.
b) Find the Risk-Neutral probability for an UP move.
My doubts are, if the pound appreciates against the dollar by 37.5 percent we would have 2.75$/£ and if euro appreciates against the dollar by ten percent, we would have 1.76$/€.
However, how can this be constructed in a binomial tree, i suspect that i need to make some cross-currency here. Anyone with a tip?
Thanks for the attention.
I'm having some doubts concerning exchange rates and the last time I got a quick answer so I'm giving a try again.
Suppose this scenario:
Spot Rates Risk-Free Rates
$1.60=€1.00 3.00% (i$)
$2.00=£1.00 4.00 (i€)
€1.25=£1.00 4.00 (i£)
And the this scenario: In the next period, if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent. On the other hand, the euro could depreciate against the pound by 10 percent.
a) Draw the binomial tree.
b) Find the Risk-Neutral probability for an UP move.
My doubts are, if the pound appreciates against the dollar by 37.5 percent we would have 2.75$/£ and if euro appreciates against the dollar by ten percent, we would have 1.76$/€.
However, how can this be constructed in a binomial tree, i suspect that i need to make some cross-currency here. Anyone with a tip?
Thanks for the attention.
Comment