1. An FI has purchased a two-year, $1,000 par value zero-coupon bond for

$867.43. The FI will hold the bond to maturity unless it needs to sell the bond at the end of one year for liquidity purposes. The current one-year interest rate is 7 percent, and the one-year rate in one year is forecast to be either 8.04 percent or 7.44 percent with equal likelihood. The FI wishes to buy a put option to protect itself against a capital loss if the bond needs to be sold in one year.