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solve in 60 mins I will give thumb up 13. The following questions are based on derivative investments. The table below shows the spot and
solve in 60 mins I will give thumb up
13. The following questions are based on derivative investments. The table below shows the spot and forwards of 6M LIBOR and 12M LIBOR. [Total: 25] (a) Evaluate the forward rates that are missing in the Table. [4] (b) Based on the 12M LIBOR spot rate, show that the 1-year continuously compounded rate rf equals 4.879%. Use the risk-free rate rf from (b) to answer the following questions. (c) The derivative team uses the binomial tree below to evaluate the 1-year American PUT option of a non-dividend stock. Determine the probability p. If the strike price is 100, find the nodes of early execution. (d) A binary option is a financial exotic option. A 1-year binary option will be automatically exercised and the long side gets 1 if the spot price at maturity is higher than the strike price 100. Evaluate the binary option price using the binomial tree from part (c). [7]Step by Step Solution
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