At the present time, one can enter five-year swaps that exchange LIBOR for 8%. Fiveyear caps with limit rates of 8% sell for $.30 per dollar of notional principal. What must be the price of five-year floors with a limit rate of 8%?

Suppose that a stock now selling for $100 will either increase in value by 15% by year-end with probability .5, or fall in value by 5% with probability .5. The stock pays no dividends.

a. What are the geometric and arithmetic mean returns on the stock?

b. What is the expected end-of-year value of the share?

c. Which measure of expected return is superior?