Which of the Following Is Assumed to Be Lognormal When

question 9

Multiple Choice

Which of the following is assumed to be lognormal when a caplet is valued?

• A) A future bond price
• B) A future swap rate
• C) A future short-term rate
• D) A future long-term rate

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Definitions:

Futures Contract

A formal, uniform agreement for purchasing or selling an item at a set price at a future date, commonly utilized for trading commodities or financial instruments.

Lumber

A term for timber after it has been processed into beams and planks, a stage in the process of wood production.

Option Payoff Profiles

Graphical representations showing the potential profit or loss of an option strategy at various underlying asset prices at expiration.

Buying A Call

Involves purchasing a call option, giving the buyer the right, but not the obligation, to buy a specific asset at a predetermined price within a specified time frame.