Use the Fact That the Pseudo-Probability of Default at Time

question 5

Multiple Choice

Use the fact that the pseudo-probability of default at time zero is (1 / 2) to answer the questions that follow.
-Consider a floorlet with maturity time 1 and strike price 0.035.What is the time 0 value of the floorlet?

• A) 0.000000
• B) 0.003525
• C) 0.003198
• D) 0.001696
• E) 0.001763

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Definitions:

Nominal Exchange Rate

The speed at which one form of currency can be traded for another.

Currency

A system of money in general use in a particular country or economic context.

Real Exchange Rate

The value of a currency in terms of another currency, adjusted for differences in price levels between countries.

Net Capital Outflow

The difference between the purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners, which reflects the flow of capital out of a country.