Estimate the probability that the exchange rate

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An exchange rate is currently $1.20. The volatility of the exchange rate is quoted as 15% and interest rates in the two countries are the same. Using the lognormal assumption, estimate the probability that the exchange rate in six months will be (a) less than or equal to $1.100, (b) between $1.100 and $1.300, and (c) greater than $1.300. Based on the volatility smile usually observed in the market for exchange rates, which of these probabilities would you expect to be too low and which would you expect to be too high?

Reference no: EM13940182

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