Question
You have built the following interest rate tree for the next 2 years: Time 0 (%) Time 1 (%) i2h = 3.11 i1 = 2.17
You have built the following interest rate tree for the next 2 years:
| Time 0 (%) | Time 1 (%) |
| i2h = 3.11 | |
| i1 = 2.17 | |
| i2l = 1.20 |
What is the value of the embedded call option in a default-free 3.28% 2-year bond which is callable at par in 1 year, based on this information?
Correct answer: 1.09
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Mathematical Control Theory And Finance
Authors: Andrey Sarychev, Albert Shiryaev, Manuel Guerra, Maria Do Rosário Grossinho
2008th Edition
3540695311, 978-3540695318
