Question: You are going to borrow 250m at a floating rate
You are going to borrow $250m at a floating rate for 5 years. You wish to protect yourself against borrowing rates greater than 10.5%. Using each tree, what is the price of a 5-year interest rate cap? (Assume that the cap settles each year at the time you repay the borrowing.)
Answer to relevant QuestionsSuppose 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 ...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 ...Verify that the 1-year yield volatility of the 4-year zero-coupon bond price generated by the tree in Figure 25.5 is 0.14. What are 95% and 99% 1-, 10-, and 20-dayVaRs for a portfolio that has $4m invested in stock A, $3.5m in stock B, and $2.5m in stock C? Repeat the previous problem, only assuming that defaults are perfectly correlated.
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