You want to build a simple 2-date interest-rate tree to price a caplet. Each period is 6 months long. The current 6m rate is r(0,6m)=4.5%, with semi-annual compounding, and you choose the two possible values in 6 months to be 5.0%, respectively 4.0%. Finally, the current 1-year rate is r(0,1y)=4.3% (also s.a. compounding). 

What is the risk-neutral probability for the outcome 5.0%?

Answer rating: 100% (QA)

I 069 is the riskneutral probability for the outcome 50 Ex... View the full answer