Assume a Binomial Pricing Model Where There Is an Equal

question 28

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 floor 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)$44,060.
• B)$66,030.
• C)$22,462.
• D)$21,598.

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Definitions:

Education Level

The highest degree or stage of education that an individual has completed.

Correlations

A measure showing the extent to which two or more variables fluctuate together.

Illusory Correlation

The mistaken perception of a relationship between two events or variables that are actually unrelated.

Positively Correlated

A relationship between two variables where they move in the same direction, meaning as one variable increases, so does the other, and vice versa.