Verify that the price of the 12% interest rate cap in Figure 25.6 is $3.909.
Answer to relevant QuestionsVerify that the 1-year forward rate 3 years hence in Figure 25.5 is 14.0134%. Suppose that the yield curve is given by y(t) = 0.10 − 0.07e −0.12t , and that the short-term interest rate process is dr(t) = (θ(t) − 0.15r(t)) + 0.01dZ. Compute the calibrated Hull-White tree for 5 years, with time ...Suppose the yield curve is flat at 8%. Consider 3- and 6-year zero-coupon bonds.You buy one 3-year bond and sell an appropriate quantity of the 6-year bond to durationhedge the position. Any additional investment is in ...Suppose you write a 1-year cash-or-nothing put with a strike of $50 and a 1-year cash-or-nothing call with a strike of $215, both on stock A. a. What is the 1-year 99% VaR for each option separately? b. What is the 1-year ...Compute the 95% 10-day VaR for a written strangle (sell an out-of-the-money call and an out-of-the-money put) on 100,000 shares of stock A. Assume the options have strikes of $90 and $110 and have 1 year to expiration. Use ...
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