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

The value of the so-called up factor is

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

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

=>      

=>      

=>      

option c) graph of line going through 1, 4 and 3, 10

step-by-step explanation:

let y equal to margo's coin collection

let x equal to number of years

at the begining x=0, y=1 → point=(x,y)→point=(0,1)

she adds 3 coins per year, then y=1+3x

at x=1, y=1+3(1)=1+3→y=4→point=(x,y)→point=(1,4)

at x=3, y=1+3(3)=1+9→y=10→point=(x,y)→point=(3,10)

the graph of line going through (1, 4) and (3, 10), then the option c is the correct.