Calculate the price of a cap on the 90-day LIBOR rate in nine months time when the
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Question:
Calculate the price of a cap on the 90-day LIBOR rate in nine months time when the principal amount is $1,000. Use Blacks model with LIBOR discounting and the following information: (a) The quoted nine-month Eurodollar futures price = 92. (Ignore differences between futures and forward rates.) (b) The interest-rate volatility implied by a nine-month Eurodollar option = 15% per annum. (c) The current 12-month risk-free interest rate with continuous compounding = 7.5% per annum. (d) The cap rate = 8% per annum. (Assume an actual/360 day count.
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