Note growth rates, future expected returns are not in the option pricing models. These factors are already incorporated into the stock price and do not need to be added again.
Assume the Canadian dollar is .95 to the US dollar. That is one Canadian dollar buys 95 cents American.
Assume the volatility or std. dev of the exchange rate is 10%, the riskfree rate in the US is r= 4%, the riskfree Canadian rate is r c =6%. The time to expiration is 3 months.
P = (a-d)/(u-d) , where a = e (r-r c )*T
U = e .10*(.25)1/2 = e.05 = 1.051271, round to 1.05
It costs nothing to take a position in the futures markets, therefore in a riskfree world the futures price should have a zero expected growth rate. We will come back to this concept later.
Therefore, e -rT = 1 , that is a = 1 and
P = (1-d)/(u-d)
Assume an asset has a volatility of .4, r=.05 and this is a 9 month call option.