Problem 3. (14 points) Consider the following rate and price tree for a straight bond. 981.65...

Transcribed Image Text:

Problem 3. (14 points) Consider the following rate and price tree for a straight bond. 981.65 9% 991.20 VHH=? 7.5% 1,027.46 6% VL=? VH=? 1,009.43 6% 1,047.02 VHL=? 4.5% VL=? 1,038.83 3% VLL =? Find the missing prices for a European put option on the bond. The option expires at the end of the second year and has an exercise price of $1,020. Also, determine whether or not it would be optimal for the holder to exercise early at the end of the first year at node H? Problem 3. (14 points) Consider the following rate and price tree for a straight bond. 981.65 9% 991.20 VHH=? 7.5% 1,027.46 6% VL=? VH=? 1,009.43 6% 1,047.02 VHL=? 4.5% VL=? 1,038.83 3% VLL =? Find the missing prices for a European put option on the bond. The option expires at the end of the second year and has an exercise price of $1,020. Also, determine whether or not it would be optimal for the holder to exercise early at the end of the first year at node H?