Calculate the price of a cap on the 90-day LIBOR rate in 9 months' time when the
Question:
Calculate the price of a cap on the 90-day LIBOR rate in 9 months' time when the principal amount is \(\$ 1,000\). Use Black's model and the following information:
(a) The quoted 9-month Eurodollar futures price \(=92\). (Ignore differences between futures and forward rates.)
(b) The interest rate volatility implied by a 9 -month Eurodollar option \(=15 \%\) per annum.
(c) The current 12-month interest rate with continuous compounding \(=7.5 \%\) per annum.
(d) The cap rate \(=8 \%\) per annum. (Assume an actual/3ó 0 day count.)
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