On January 11, the spot exchange rate for the U. dollar is $0.70 per Canadian dollar. In one year's time, the Canadian dollar is expected to...

On January 11, the spot exchange rate for the U.S. dollar is $0.70 per Canadian dollar. In oneyear's time, the Canadian dollar is expected to appreciate by 20 percent or depreciate by 15percent. We have a European put option on U.S. dollars expiring in one year, with anexercise price of 1.39 CND$£US$, that is currently selling for a price of $2.93. Each putoption gives the holder the right to sell 10,000 U.S. dollars. The current one-year CanadianTreasury Bill rate is 2 percent, while the one-year U.S. Treasury Bill rate is 3 percent, bothcompounded annually. Treat the Canadian dollar as the domestic currency. a. What is the estimated value of this put option by using the binomial model?(5 marks} b. Calculate the estimated value of this put option for U.S. T-Bill rates of 0%, 1%, 2%,4%, 5%, and 6%. Plot these values in a graph (by hand or using Excel), with putoption values on the y-axis and U.S. T-bill rates on the x—axis. What can we conclude about the relationship between foreign interest rates and foreign currency put optionvalues? (2.5 marks} c. Calculate the estimated value of this put option for Canadian T-Bill rates of 0%, 1%,2%, 4%, 5%, and 6%. Plot these values in a graph (by hand or using Excel}, with putoption values on the y-axis and Canadian T-bill rates on the x—axis. What can weconclude about the relationship between domestic interest rates and foreign currencyput option values? (2.5 marks}