Assume Annual Compounding $\sigma = 0.30$ What Is the Price of a One-Year Maturity Call Option

question 16

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 call option on a 7.5% coupon (annual pay) bond at a strike of $100 (ex-coupon) ?

• A)0.80
• B)0.90
• C)1.00
• D)1.10