What should the continuous dividend yield be replaced by when options on an exchange rate are valued using the formula for an option of a stock paying a continuous dividend yield?
A) the domestic risk-free rate
B) the foreign risk-free rate
C) the foreign risk-free rate minus the domestic risk-free rate
D) none of the above

Question

Quizplus · Accepted Answer

When valuing options on an exchange rate, the continuous dividend yield is replaced by the foreign risk-free rate in the formula. This is because the foreign risk-free rate represents the opportunity cost of holding foreign currency.

What Should the Continuous Dividend Yield Be Replaced by When