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

question 11

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 inputs into the HJM libor model caplets formula are NOT easily observable?

• A) zero-coupon bond prices
• B) simple forward interest rates
• C) cap rate
• D) maturity
• E) the average forward rate volatility

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