When Moving from Valuing an Option on a Non-Dividend Paying

question 2

Multiple Choice

When moving from valuing an option on a non-dividend paying stock to an option on a currency which of the following is true?

• A) The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate in all calculations
• B) The formula for u changes
• C) The risk-free rate be replaced by the excess of the domestic risk-free rate over the foreign risk-free rate for discounting
• D) The risk-free rate be replaced by the excess of the domestic risk-free rate over the foreign risk-free rate when p is calculated