b) Price an interest swap that pays 0.5*face amount*(one-period spot rate - 8%) at period 1 and 2.

c) If the market price for the swap in (b) suggests a -100 bps OAS from the model, what is the market price?

3. The one-period interest rate follows the following binomial tree. Each period is 0.5 year, assuming semi-annual compounding. The risk neutral probability for the rate to go up at any node 1s 0.5 r(2,3;uu) = 14% r(1,2;u) = 12% r(0,1)= 10% (2,3,ud) = 10% I(1,2;d) = 8% (2,3dd) = 6%