A stock that pays no dividends is worth So = 50 euros today. 

The risk-free interest rate with continuous compounding is 3% for the maturity T = 2 months. Assume that, in two months, the stock can take one of the two values Sou = 53 euros or Sod = 48 euros. Calculate the price of a European put on the stock with maturity T and exercise price K= 51 euros.

2. The risk-free rates with annual compounding are currently 4% for all maturities. 

Calculate the price of a floorlet that pays in three years 1000 max(4%-R, 0) €, where R is the one year LIBOR rate with annual compounding that will be determined in two years from now. Assume the forward interest rate volatility for the corresponding period is 20% per year?

The risk-free rates with annual compounding are currently 5% for all maturities. 

Calculate the price of a swaption of maturity 6 years that gives the right to its holder to receive the fixed rate 4% in an annual swap of maturity 3 years and notional 100 €. Assume the forward swap rate volatility for the corresponding period is 20% per year?

Answer rating: 100% (QA)

Solution 1 We can use the binomial option pricing model to value the European put option The stock can take two values in two months so there are two ... View the full answer