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Exercise 4:
The current exchange rate is 0.8 USD for 1 AUD. Each year the value of the USD relative to the AUD can either
go up by 25% with probability 25%
stay constant with probability 50% go down by 20% with probability 25%
a) Fill out the following table for the exchange rates and the corresponding probabilities.
Year - Exchange rate - Probability
t=1
t=2
b) We obtain 100 USD in 2 years from now. Calculate the value of the 100 USD in AUD for each of the potential exchange rates.
Year - Exchange rate - Value of 100 USD in AUD
t=2
c) Calculate the variance of the 100 USD payment in AUD.
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