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Calculate u, d, and p when a binomial tree is constructed to value an option on...

Calculate u, d, and p when a binomial tree is constructed to value an option on a foreign currency. The tree step size is 1 month, the domestic interest rate is 5% per annum, the foreign interest rate is 8% per annum (each compounded continuously), and the volatility is 12% per annum.

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Answer #1

t = 1 month = 1/12 year

σ = 12%

rd = 5%, rf = 8%

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