Consider a One-Factor HJM Model Where the Initial Forward Curve $T$

question 14

Multiple Choice

Consider a one-factor HJM model where the initial forward curve is given as 6% for one year and 7% between one and two years.The evolution of continuously-compounded one-year forward rates beginning at time $T$ ,is given by the following binomial process: $f ( t + 1 , T ) = f ( t , T ) + \alpha \pm 0.02$ ,where the up and down movements are equiprobable.What is the price of a one-year call option on a two-year 6.5% coupon bond,with a strike price of $100 ex-coupon?

• A)0.50
• B)0.55
• C)0.60
• D)0.65

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Definitions:

Haploid

Having a single set of unpaired chromosomes, a condition typical of gametes in sexually reproducing organisms.

Diploid

Referring to a cell or organism that has two sets of chromosomes, one set inherited from each parent.

Malpighian Tubules

Excretory structures in some insects that remove waste products from the blood and empty them into the intestines for elimination.

Tympanum

The membrane in the ear that vibrates in response to sound waves; also known as the eardrum.