You are required to assume that the only date on which the embedded option can be exercised is 28-Oct-2021 (i.e. ignore the 28-Jul-2022 date stated in the description). You should also assume that interest rate volatility is 25% and that interest rates follow a lognormal model, with an equal probability of an increase and decrease in rates each year. To make the valuation a little easier, you should assume that the valuation date is 28-Oct-2018 so that you do not have to consider accrued interest.

The relevant Euro-denominated benchmark par curve is as follows:

Maturity Years; 1, 2, 3, 4

Par Rate: -0.5%; -0.336%; -0.109%; +0.135

1. Determine the price of this security (as a % of face value) assuming that OAS is equal to zero. Briefly explain why the price you have calculated will not precisely match the true theoretical price.
2. Determine the OAS of the security given the current market price of the security is 101.50.
3. Compute an appropriate measure of duration and convexity for this security. You should clearly state which measure you have selected and briefly explain why.