Suppose that the exchange rate is 1 dollar for 120 yen the, Financial Management

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Suppose that the exchange rate is 1 dollar for 120 yen the

Suppose that the exchange rate is 1 dollar for 120 Yen. The dollar interest rate is 5%(continuously compounded) and the yen rate is 1%(continuously compounded). Consider an at the money American dollar call that is yen-denominated. The option has 1 year to expiration and the exchange rate volatility is 10%. Let n=3.

1) What is the price of a European call? An American call?

2) What is the price of a European put? An American put?

3) How do you account for the pattern of early exercise across the two options?

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Financial Management: Suppose that the exchange rate is 1 dollar for 120 yen the

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