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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