Suppose 1 year rates are 9.8%, and next year, one year rates will be either 12% or 7.6% with equal probability. What is the value of a 2 year cap with a cap rate of 10.9%. Assume all rates are annual rates, the cap pays annually in arrears, and the notional is $1 million

Answer rating: 100% (QA)

To calculate the value of the cap we need to first calculate the expected payoff of the c... View the full answer