Use the following information to price a three-year collar by purchasing an outof- the-money cap and writing
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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.
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Related Book For
Financial Institutions Management A Risk Management Approach
ISBN: 9781266138225
11th International Edition
Authors: Anthony Saunders, Marcia Millon Cornett, Otgo Erhemjamts
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