A Futures price is currently €80. Over each of the next two 3 month periods it will rise or fall by 10%. The risk free rate is 8% p.a. (i)Using replicating portfolio techniques, find the value of a 6 month European call option on the futures with strike €80. (ii)Verify your answer using risk-neutral valuation. (iii) Would your answer change if the call was American?
A Futures price is currently €80. Over each of the next two 3 month periods it will rise or fall by 10%. The risk free rate is 8% p.a. (i)Using replicating portfolio techniques, find the value of a 6 month European call option on the futures with strike €80. (ii)Verify your answer using risk-neutral valuation. (iii) Would your answer change if the call was American?
Chapter5: Currency Derivatives
Section: Chapter Questions
Problem 3BIC
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- A Futures price is currently €80. Over each of the next two 3 month periods it will rise or fall by 10%. The risk free rate is 8% p.a.
(i)Using replicating portfolio techniques, find the value of a 6 month
European call option on the futures with strike €80.
(ii)Verify your answer using risk-neutral valuation.
(iii) Would your answer change if the call was American?
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