# Question: A What is the 2 year forward price for a 1 year

a. What is the 2-year forward price for a 1-year bond?

b. What is the price of a call option that expires in 2 years, giving you the right to pay $0.90 to buy a bond expiring in 1 year?

c. What is the price of an otherwise identical put?

d. What is the price of an interest rate caplet that provides an 11% (effective\ annual rate) cap on 1-year borrowing 2 years from now?

b. What is the price of a call option that expires in 2 years, giving you the right to pay $0.90 to buy a bond expiring in 1 year?

c. What is the price of an otherwise identical put?

d. What is the price of an interest rate caplet that provides an 11% (effective\ annual rate) cap on 1-year borrowing 2 years from now?

## Answer to relevant Questions

Using Monte Carlo, simulate the process dr = a(b − r)dt + σ√rdZ, assuming that r = 6%, a = 0.2, b = 0.08, φ = 0 and σ = 0.02. Compute the prices of 1-, 2-, and 3-year zero coupon bonds, and verify that your answers ...Construct a four-period, three-step (eight terminal node) binomial interest rate tree where the initial interest rate is 10% and rates can move up or down by 2%; model your tree after that in Figure 25.3. Compute prices and ...Using the same assumptions as in Problem 26.12, compute the 10-day 95% VaR for a claim that pays $3m each year in years 7–10. In Problem 26.12 Suppose the 7-year zero-coupon bond has a yield of 6% and yield volatility of ...Using Monte Carlo, compute the 95% and 99% 1-, 10-, and 20-day tail VaRs for the position in Problem 26.2. Suppose the firm issues a single zero-coupon bond with time to maturity 3 years and maturity value $110. a. Compute the price, yield to maturity, default probability, and expected recovery (E [BT| Default]). b. Verify that ...Post your question