Consider the Following Table of Prices of Five-Year Semi-Annual Pay

question 5

Multiple Choice

Consider the following table of prices of five-year semi-annual pay caps and floors: $$\begin{array} { | c | c | c | } \hline \text { Strike (\%/9) } & \text { Cap price } & \text { Floor price } \\\hline 4 \% & 2.50 & 0.50 \\\hline 5 \% & 1.50 & 1.50 \\\hline 6 \% & 0.50 & 2.50 \\\hline\end{array}$$ Assume that the caps and floors also include the first payment in 6 months,so there are 10 payment dates in each instrument.The quoted prices of the caps and floors includes this first payment for which the floating leg has already been set.What is the fixed-rate on a five-year fairly priced swap?

• A)4%
• B)5%
• C)6%
• D)Not possible to determine from the available information.

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Definitions:

Deindividuation

A psychological state characterized by diminished self-consciousness, reduced social identity, and disinhibited behavior, often occurring in group settings.

Groupthink

A psychological phenomenon that occurs within a group of people when the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome.

Self-Serving Bias

The common habit of a person taking credit for positive events or outcomes, but blaming outside factors for negative events.

Fundamental Attribution Error

The tendency to overemphasize personal characteristics and ignore situational factors when judging others' behavior.