Question: The payoff from a derivative will occur in 8 years. It will equal the average of the one-year risk-free interest rates observed at times 5,

The payoff from a derivative will occur in 8 years. It will equal the average of the one-year risk-free interest rates observed at times 5, 6, 7, and 8 years applied to a principal of $1,000. The risk-free yield curve is flat at 6% with annual compounding and the volatilities of all rates are 16%. Assume perfect correlation between all rates. What is the value of the derivative?

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