Problem 5.Consider a financial model where one can borrow and lend money at year i and up
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Problem 5.Consider a financial model where one can borrow and lend money at year i and up to year i + 1 at the interest rate R(i, i + 1). Consider the float note which has notional N = $1000, maturity T = 20 years and, in addition to the notional payment at maturity, pays coupon yearly. The value of the coupon paid at time i + 1 is computed at time i and is given by R(i, i + 1)N. Compute V0, the arbitrage-free price of the note at its issue time. Remark/hint: even though this problem involves time-varying interest rates, at least one way of solving this problem relies solely on the idea of replication.
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