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Maturity (years) Spot rate (%) 1-year Forward rate (%) Cash flow 1 1.25 0-years from now 1.25 $3 2 1.5019 1-year from now 1.75 $3
Maturity (years) Spot rate (%) 1-year Forward rate (%) Cash flow 1 1.25 0-years from now 1.25 $3 2 1.5019 1-year from now 1.75 $3 3 1.70491 2-years from now 1.908 $103 Using the binomial model (which assumes that one-year rates undergo a lognormal random walk with volatility o), if o is assumed to be 10%, what is the lower one-year forward rate one year from now given that the higher one-year forward rate one year from now is 1.80%? 2 A. 1.474% B. 1.247% O C. 1.10% OD. 1.747%
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