Suppose the cap rate of a cap and the floor rate of a floor are both set equal to L Let C(t T 0 , ,T n ) and F(t T 0 , ,T n ) denote the time t value of the cap and floor, respectively Prove the following cap floor parity relation n C F B(t T 1) (1 L)B(t T ) i 1...

Certainly To prove the capfloor parity relation lets start by defining the terms and breaking down t ...

Suppose the cap rate of a cap and the floor rate of a floor are both set

Question:

Suppose the cap rate of a cap and the floor rate of a floor are both set equal to L. Let C(t; T₀, ··· ,T_n) and F(t; T₀, ··· ,T_n) denote the time-t value of the cap and floor, respectively. Prove the following cap-floor parity relation:

n C - F = [B(t; T-1) (1 + L)B(t; T;)]. i=1

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For answer-question

Mathematical Models Of Financial Derivative

ISBN: 9783642447938

2nd Edition

Authors: Yue-Kuen Kwok

See More Books

Question Posted: Nov 30, 2023 07:31 AM

See More Questions

KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
Which statement below best describes the Work Breakdown Structure: Group of answer choices Is a deliverable-oriented grouping of project elements Organizes and defines the total scope of the project...
Let rt denote the short rate at time t and suppose we have an affine term structure model so that where A(t, T) and B(t, T) are deterministic functions of time t and maturity T. (a) Let f (t; s, s +...
A trader depreciates his vehicles at 40% per annum using the reducing balance method, with proportionate depreciation in the year of acquisition. In addition to vehicles acquired on 1 July 2010 for...
Explain how information technology affects strategies of the organization where you worked most recently.
Ronald Lau, chief engineer at South Dakota Electronics, has to decide whether to build a new state-of-the-art processing facility. If the new facility works, the company could realize a profit of...
How do you prevent name clashes when using header files?
On January 1, 2014, Doone Corporation acquired 60 percent of the outstanding voting stock of Rockne Company for $300,000 consideration. At the acquisition date, the fair value of the 40 percent...
(d) What is the value of "j" after the execution of the partial code in Figure 4.2? Explain your answer. int j = 10; for (int i = 0; 0; i
Under the risk neutral measure, suppose the dynamics of the domestic interest rate r d and foreign interest rate r f follow the mean-reversion processes: Let df and fX denote the correlation...
The no arbitrage bond price process is assumed to follow the m-dimensional Gaussian HJM model. Let t < T 0
Mr. Thuet owns a food truck selling Vietnamese food around a university. His monthly fixed cost for operating the truck is $3,000, and variable cost is 70% of the revenue. The business generated...
Your firm has a well-respected economic research staff. The staff members have been successful in developing econometric models that can predict macroeconomic variables with a surprisingly degree of...
A taxpayer claimed the lifetime learning credit on the federal section of the tax return. Can they also claim the education of the state seccion?
What decisions need to precede the planning audit? write a brief discussion ,why these decision are need to proceed?
24. X Corp. issues a bond on July 1, 2005 with a maturity date of July 1, 2019. The bond has a 5% coupon and was issued for par. Its stated redemption price and issue price was $10,000 per bond. On...
Identify and explain the purpose of FDR's Judicial Reorganization Bill & the Retirement Bill (these are two separate bills!)
The length of a steel rod at 5C is 12.500 m. What is its length when heated to 154C?
Define a traverse in Surveying?
Sheila Jackson is a 50% shareholder in Washington, Inc., an S corporation. This year, Jacksons share of the Washington loss is $100,000. Jackson has income from several other sources. Identify at...
TyroneCo, an S corporation with a positive E & P balance, reports gross receipts for the year totaling $400,000 (of which $200,000 is PII). Expenditures directly connected to the production of the...
Dion, a shareholder, owned 20% of Meadow Brooks stock for 292 days and 25% for the remaining 73 days in the year. Using the per-day allocation method, compute Dions share of the following S...
Ethanol with a density of 789 kg/m moves through a constricted pipe in steady, ideal flow. At the lower point shown in the figure below, the pressure is P = 1.85 x 104 Pa, and the pipe diameter is...
Lime Industries, Inc. uses 97,820 units of inventory every year. It generally takes seven days for the company to order and receive new inventory. Lime likes to keep an additional seven days of...
You are examining a firm after a proposed merger takes place with the information provided: < $ in millions Acquiring Company Target Company Book Value Assets Book Value Equity Book Value Market...

Suppose the cap rate of a cap and the floor rate of a floor are both set

Question:

n C - F = [B(t; T₁-1) − (1 + α¡L)B(t; T;)]. i=1

Step by Step Answer:

Certainly To prove the capfloor parity relation lets start by defining the terms and breaking down t...View the full answer

Mathematical Models Of Financial Derivative

Students also viewed these Business questions