Find the Premium of a Correctly Priced Interest Rate Call

question 26

Multiple Choice

Find the premium of a correctly priced interest rate call on 30-day LIBOR if the current forward rate is 7 percent,the strike is 7 percent,the continuously compounded risk-free rate is 6.2 percent,the volatility is 12 percent and the option expires in one year.The notional principal is $30 million.

• A)$.0031
• B)$93,000
• C)$7,817
• D)$0.0012
• E)$36,000

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Definitions:

Outstanding Shares

The total number of shares of stock that are owned by stockholders on any particular date.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, representing ownership interest.

Treasury Stock

Shares that were originally issued and fully paid for but have since been bought back by the issuing company, reducing the amount of outstanding stock.

Purchases

The acquisition of goods or services in exchange for monetary payment in the course of business operations.