1. Assume an economy where One period is one year. The one year short term interest rate from time n to time n +1 is in The rate evolves via a stochastic process {rn}n, where: To = 0.02 1 P[rn+1 = 2rn] = (1) n= = P [pos = Consider now a zero-coupon bond that matures in 2-years with common face and redemption value F = 100. Consider American Call Options on this bond that expire in 2 years with strike K = 97. Denote Bn and CA as the bond and call option values at time n, respectively. Calculate the initial bond price Bo, (40 pts) and the initial American Call Option price Co (60 pts). 1. Assume an economy where One period is one year. The one year short term interest rate from time n to time n +1 is in The rate evolves via a stochastic process {rn}n, where: To = 0.02 1 P[rn+1 = 2rn] = (1) n= = P [pos = Consider now a zero-coupon bond that matures in 2-years with common face and redemption value F = 100. Consider American Call Options on this bond that expire in 2 years with strike K = 97. Denote Bn and CA as the bond and call option values at time n, respectively. Calculate the initial bond price Bo, (40 pts) and the initial American Call Option price Co (60 pts)