Determine the price of a European call option on a 6.5% four-year Treasury bond with a strike price of 100.25 and two years to expiration assuming: (1) the arbitrage-free binomial interest-rate tree shown in Exhibit 30-10 (based on a 10% volatility assumption),and (2) the price of the Treasury bond two years from now shown at each node.
Answer to relevant QuestionsDetermine the price of a European put option on a 6.5% four-year Treasury bond with a strike price of 100.25 and two years to expiration assuming the same information as in Exhibit 30-10. What arguments would be given by those who feel that the Black-Scholes model does not apply in pricing interest-rate options? Given the current 3-month LIBOR and the Eurodollar futures prices shown in the table below, compute the forward rate and the forward discount factor for each period. In determining the cash flow for the floating-rate side of a LIBOR swap, explain how the cash flow is determined. For a CDS with the following terms, indicate the quarterly premium payment by filling in the below exhibit.
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