Question: I have this extremely difficult question from class which I am struggling to understand. It has to be done in an excel worksheet. The Par

I have this extremely difficult question from class which I am struggling to understand. It has to be done in an excel worksheet.

The Par curve today is as follows.

Time

1

2

3

Par rates

4.6500%

4.9800%

5.8900%

1. generate the no-arbitrage, binomial interest rate tree, with u = d.EXP (2(t^0.5)), probability 50/50 and Volatility 25%

2. calibrate the tree to current term structure

3. price a 3-yr, 7%, Annual pay, option free

4. price a 3-yr, 7%, Annual pay, callable in 1 year

5. price a 3-yr, 7%, Annual pay, puttable in 1-year

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