Today is November 3, 2008, and the 3-month LIBOR, swap rates and cap prices are as in Table 11.26.
(a) Fit the LIBOR curve (see Exercise 5).
(b) Compute the implied volatilities from the simple BDT model.
(c) Compute the forward volatilities from the BDT model.
(e) On this tree, value the corridor note discussed in Table 11.25.
Issuer...................................... HAL Corp.
Rating .................................... AAA
Pricing Date .............................. November 3, 2008
Maturity Date ............................ November 3, 2013 100
Principal.................................... 100
Coupon Frequency ....................... Quarterly
Coupon.....................................5.4% if reference rate within corridor bounds; 0% otherwise 1%
Corridor Lower Bound .................. 1%
Corridor Upper Bound ................... 5%
Reference Rate..............................3 Month LIBOR on previous fixing date