Question: VI. n = 10 r0,0 = 5% u = 1.1 d = 0.9 q = 1 - q = Compute the initial price of a

VI.

n = 10 r0,0 = 5% u = 1.1 d = 0.9 q = 1 - q =

Compute the initial price of a swaption that matures at time t=5 and has a strike of 0. The underlying swap is the same swap as described in the previous question with a notional of 1 million. To be clear, you should assume that if the swaption is exercised at t=5 then the owner of the swaption will receive all cash-flows from the underlying swap from times t = 6t=6 to t = 11t=11 inclusive. The swaption strike of 0 should also not be confused with the fixed rate of 4.5% on the underlying swap.

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