Assume a Binomial Pricing Model Where There Is an Equal

question 20

Multiple Choice

Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year.

What should be the price of a three-year 6 percent cap if the current (spot) rates are also 6 percent? The face value is $5,000,000,and time periods are zero,one,and two.

• A)$25,000.
• B)$20,409.
• C)$22,041.
• D)$42,450.

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Definitions:

Automobile Factory

A manufacturing facility dedicated to producing automobiles, encompassing assembly lines and machinery specific to vehicle production.

Foreign Direct Investment

A company or individual from one country investing in another country by either setting up business operations or buying business assets there.

Foreign Portfolio Investment

Investment in a country's securities, such as stocks and bonds, by non-resident investors, not aiming for control but rather intended for financial return.

Net Capital Outflow

The difference between the domestic purchase of foreign assets and the foreign purchase of domestic assets over a given period, reflecting the flow of capital from and into a country.