Question: An exchange rate is currently $0.8500 per unit of the foreign currency. The volatility of the exchange rate is 15%. Interest rate in $ is 5% while the interest rate in the foreign currency is 2%. Both rates are quoted per annum on a continuously compounded basis. Using the lognormal assumption, estimate the probability that the exchange rate in four months will be:
a. less than or equal to $0.800,
b. between $0.800 and $0.900, and
c. greater than $0.900.