Assume a Binomial Pricing Model Where There Is an Equal

question 63

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.
• E)$66,030.

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Definitions:

Punishment

A consequence designed to reduce or eliminate a behavior through negative or unpleasant outcomes.

Operant Technique

A method in behavioral psychology involving reinforcements or punishments to influence the frequency of a behavior.

Positive Reinforcement

The addition of a rewarding stimulus following a desired behavior, increasing the likelihood of its future occurrence.

Punishment

The imposition of an undesirable or unpleasant outcome upon a group or individual in response to a behavior deemed unacceptable or harmful.