4) You have modeled the interest rate with the following process: dr=.002dt+.04dz (or dw whichever you prefer) R(0,.5)=.04 R(0,1)=.042 a) You have an option which will pay either 1,000 if the rate is high And -1,000 if the rate is low. What is the model price of this option if you set the interest rate model to be arbitrage free with respect to these two bonds? b) If the OAS is 100bps what is the market price? c) What are two reasons the OAS could exist?