Calculate the price of a cap on the three-month LIBOR rate in nine months time for a
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Quoted nine-month Eurodollar futures price = 92
Interest-rate volatility implied by a nine-month Eurodollar option = 15% per annum
12-month risk-free interest rate with continuous compounding = 7.5% per annum
Cap rate = 8% per annum Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will...
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The quoted futures price corresponds to a forward rate is 8 per annum with qua...View the full answer
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