Question
4. A call option on a bond with a duration of 6.88 years and a YTM of 5% has a strike price of $94. The
4. A call option on a bond with a duration of 6.88 years and a YTM of 5% has a strike price of $94. The price of the bond today is 93.47. The option costs the buyer 50 cents. (Use MD or D to get your answer). a. What is the interest rate that makes the call option just worth exercising? b. If interest rates fell to 3.5% on the maturity date of the option what would the approximate net profit be?
a. What is the interest rate that makes the call option just worth exercising? b. If interest rates fell to 3.5% on the maturity date of the option what would the approximate net profit be?
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