If the (1,1 $\sigma = 0.15$ ,And the One-Year Spot Rate Is 4%,what Is the NPV

question 4

Multiple Choice

If the (1,1.5) -year forward rate is lognormal with volatility $\sigma = 0.15$ ,and the one-year spot rate is 4%,what is the NPV of a $100,000-notional $12 \times 18$ -FRA at a 5% strike rate if the (1,1.5) -year forward rate is 6%,as seen from the buyer's point of view? (Assume the Black model applies for interest-rate options. )

• A) \(- \$ 470.88\)
• B)$0
• C)$475.61
• D)$480.39

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Definitions:

Thorndike's Law

The principle that behaviors followed by favorable consequences become more likely, and behaviors followed by unfavorable consequences become less likely, known as the law of effect.

Effect

Refers to the outcome or impact that results from a particular cause or action.

Positive Reinforcement

A process in behavior reinforcement where a behavior is encouraged by rewarding a desirable outcome.

Negative Reinforcement

A behavioral principle where the removal of an unpleasant stimulus following a desired behavior strengthens that behavior.