4. Options on Interest Rates- 25 Points Using the annually-compounded short-term interest rates implied by the Ho-Lee model: r2,3 10.0% 11,2 = 8.47% A E r0,1 = 6.30% 12,3 = 6.32% 11,2 = 4.84% t = 0 t = 1 12,3 = 2.77% t = 2 (a) What is the evolution of the floorlet 1 with a strike rate x = 5%, maturity T = 1 year and the notional amount N = 1000 written on the short-term interest rate? (b) What is the evolution of the floorlet 2 with a strike rate x = 5%, maturity T = 2 year and the notional amount N = 1000 written on the short-term interest rate? What is the evolution of the floor which is the portfolio of floorlet 1 and floorlet 2? 4. Options on Interest Rates- 25 Points Using the annually-compounded short-term interest rates implied by the Ho-Lee model: r2,3 10.0% 11,2 = 8.47% A E r0,1 = 6.30% 12,3 = 6.32% 11,2 = 4.84% t = 0 t = 1 12,3 = 2.77% t = 2 (a) What is the evolution of the floorlet 1 with a strike rate x = 5%, maturity T = 1 year and the notional amount N = 1000 written on the short-term interest rate? (b) What is the evolution of the floorlet 2 with a strike rate x = 5%, maturity T = 2 year and the notional amount N = 1000 written on the short-term interest rate? What is the evolution of the floor which is the portfolio of floorlet 1 and floorlet 2