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.