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MFE Exam: Binomial Model for Exchange Rates by 1121876p is a document available to read on EtoBox.

The 2-year binomial tree models the exchange rate between the US dollar and Canadian dollar. The tree shows that with a 40.5660% probability of an up-step each year, the exchange rate can reach 1.4520, 1.3200, 1.2000, 1.0800, 1.1880, or .9720 Canadian dollars at time 2. The risk-neutral expected present value of the possible outcomes at time 2 is equal to the initial exchange rate of 1.2000 Canadian dollars, confirming the model is correctly specified.

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1121876p

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EN