Assume Annual Compounding $\sigma = 0.30$ What Is the Price of a One-Year Maturity Floor on BDT

question 19

Multiple Choice

Assume annual compounding.The one-year and two-year zero-coupon rates in the BDT model are 6% and 7%.The volatility is given to be $\sigma = 0.30$ .What is the price of a one-year maturity floor on the one-year interest rate at a strike rate of 8% and a notional of $100?

• A)1.000
• B)1.026
• C)1.052
• D)1.078

---

Definitions:

Control Group

A group in an experiment or study that does not receive treatment by the researchers and is then used as a benchmark to measure how the other tested subjects do.

Masking

A method used in research where the participants and/or researchers are unaware of which individuals are in the control group and which are in the experimental group, to prevent bias.

Confounding

A situation in which the effect of two variables on a third is not clearly distinguishable.

Validity

The accuracy with which a study reflects the true situation.