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

=>      

=>      

=>      

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step-by-step explanation:

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