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

question 19

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 average forward rate volatility?

• A) It can be estimated using historical data on forward rates.
• B) It can be estimated implicitly using caplet prices.
• C) If the HJM libor model is rejected using historical data,it can be estimated using calibration.
• D) If the HJM libor model is accepted using historical data,it can be estimated using calibration.
• E) If the HJM libor model is rejected,it can be estimated using historical data.

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