Exercise 1: i=0 i=1 i=2 12. 0.1299 T1, 0.0868 To = 0.04 12.ud = 0.0723 T1,d=0.0268 12.dd = 0.0147 You have estimated the risk neutral interest rate tree for the continuously compounded interest rate as in the table above. There is equal risk neutral probability to move up or down the tree and each interval time represents 6 months, that is, = 0.5. Part I: 1. Compute the discount factors for all maturities. 2. Compute the price of a security that pays $100 at time i = 2 if the continuously compounded interest rate at that time is more than 7.00% and zero otherwise. 3. Compute the price of a 1.5-year cap, with semi-annual payment, strike rate r = 5%, and notional N 100. =