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

question 13

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 $100 notional one-year floor on the one-year forward rate at a strike rate of 7%.

• A)0.85
• B)0.89
• C)0.95
• D)1.00

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