period time (in years) = 0.5 11,u = 3% To = 1.6% 71,d = 1% 6. Consider the interest rate tree in the above Table. (a) Compute the expected 6-month Treasury rate E[r]. (mean return of r1) (b) Compute the risk neutral probability p*. (c) The 1-year Treasury bill is trading at Po(2) = 96. What is the semi-annual compounded forward rate for the periods i = 1 to i = 2? (d) Consider an option with payoff Option payoff at 1 = 100 x max ( - 2%,0) Compute the value at time i = 0 of the option. i=0 t = 0 i = 1 t with prob. p = 1/2 with prob. 1-p=1/2 period time (in years) = 0.5 11,u = 3% To = 1.6% 71,d = 1% 6. Consider the interest rate tree in the above Table. (a) Compute the expected 6-month Treasury rate E[r]. (mean return of r1) (b) Compute the risk neutral probability p*. (c) The 1-year Treasury bill is trading at Po(2) = 96. What is the semi-annual compounded forward rate for the periods i = 1 to i = 2? (d) Consider an option with payoff Option payoff at 1 = 100 x max ( - 2%,0) Compute the value at time i = 0 of the option. i=0 t = 0 i = 1 t with prob. p = 1/2 with prob. 1-p=1/2