Assume a Binomial Pricing Model Where There Is an Equal

question 88

Multiple Choice

Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year. What should be the price of a three-year 6 percent cap if the current (spot) rates are also 6 percent? The face value is $5,000,000, and time periods are zero, one, and two.

• A)$25,000.
• B)$20,409.
• C)$22,041.
• D)$42,450.
• E)$66,030.

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Definitions:

Anticipates Consequences

The act of foreseeing or predicting the outcomes or results of a particular action or decision.

Manager

An individual responsible for controlling or administering an organization or group of staff.

Efficient

The quality of achieving maximum productivity with minimum wasted effort or expense.

Core Critical Thinking Skills

Fundamental abilities in critical thinking, such as analysis, evaluation, inference, explanation, and self-regulation.