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Question
Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year.
What should be the price of a three-year 6 percent cap if the current (spot) rates are also 6 percent? The face value is $5,000,000, and time periods are zero, one, and two.
A. $25,000.
B. $20,409.
C. $22,041.
D. $42,450.
E. $66,030.
Answer
This answer is hidden. It contains 227 characters.
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