Use the following information to price a three-year collar by purchasing an outof- the-money cap and writing

Question:

Use the following information to price a three-year collar by purchasing an outof-

the-money cap and writing an in-the-money floor. Assume a binomial options pricing model with an equal probability of interest rates increasing 2 percent or decreasing 2 percent per year. Current rates are 4 percent, the cap rate is 7 percent, and the floor rate is 4 percent. The notional value is $1 million. All interest payments are annual payments as a percent of notional value and all payments are made at the end of year 2 and the end of year 3.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Financial Institutions Management A Risk Management Approach

ISBN: 9781266138225

11th International Edition

Authors: Anthony Saunders, Marcia Millon Cornett, Otgo Erhemjamts

Question Posted: