A Company Buys a Caplet Today (Time 0)with Maturity T

question 10

Multiple Choice

A company buys a caplet today (time 0) with maturity T = 1 year and a strike rate of k = 3 percent on a notional of L_N = $200 million.Suppose the six-month bbalibor rate realized after one year is 4.5 percent.Assume that there are 181 days in this six-month period and the year has 365 days.
-Which of the following statements is NOT true with respect to the HJM libor model?

• A) The caplet's price can be computed using risk-neutral valuation.
• B) The simple forward rate is a martingale using the pseudo-probabilities.
• C) The model assumes investors are risk-neutral.
• D) The pseudo-probabilities are the actual probabilities adjusted for an interest rate risk premium.
• E) The HJM libor caplet formula is similar in appearance to the Black-Scholes-Merton model call formula.

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