In the caplet Example 23.6, construct the synthetic caplet using the three-period zero and mma (the caplet

Question:

In the caplet Example 23.6, construct the synthetic caplet using the three-period zero and mma (the caplet has a strike rate of k = 0.04 or 4 percent) Show that the cost of construction is 0.003, the same as that with the two-period zero- bond.
Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...