In 54 months time you expect a cash flow of $3 million. Calculate it's present value (PV)
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Question:
In 54 months time you expect a cash flow of $3 million. Calculate it's present value (PV) given the 54-month interest rate is currently 4%, with a volatility of 120 basis points (bps). Explain, using equations with properly-defined mathematical notation, how to map this cash flow to vertices at 4 years and 5 years, in such a way that the volatility of the present value of the mapped cash flow remains at 120 bps.
Suppose the 4-year rate has a volatility of 110 bps and the 5-year rate has a volatility of 150 bps, and their correlation is 0.9?
How much should be mapped to each vertex. Give your answer in PV terms and round your answers to whole $ values?
Expert Answer:
To calculate the present value PV of the cash flow of 3 million in 54 months we can use the formula ... View the full answer
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