Answer-first summary for fast verification
Answer: $8,035.
This is a binomial interest rate option valuation problem. The call option on the 1-year spot rate has a strike rate of 3.5%. The option value is calculated using risk-neutral probabilities and discounting expected payoffs. Given the risk-neutral probability of 0.50 and the bond values provided in the exhibit (which are not shown in the text), the calculation would involve: 1. Calculating the option payoff at expiration for each interest rate scenario 2. Weighting the payoffs by risk-neutral probabilities 3. Discounting back to present value using appropriate discount factors The correct answer of $8,035 suggests this calculation was performed using the binomial model framework for interest rate options.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
$1 million, and the exercise rate is 3.5%. The risk-neutral probability of an up move is 0.50. The current and expected 1-year interest rates are shown in the exhibit below, along with the values of a 1-year zero-coupon bond of $1 notional value for each interest rate.At time step 0, the value of the interest rate option is closest to:
A
$8,035.
B
$8,356.
C
$9,615.
No comments yet.