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

question 16

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 caplet with maturity time 1 and strike price 0.035.What are the payoffs to the option at time 1 in the up and down nodes?

• A) 0.000000,0.006649
• B) 0.003525,0.000000
• C) 0.003198,0.001696
• D) 0.000000,0.003325
• E) 0.001763,0.000000

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Definitions:

Free Floating Exchange Rate System

A currency system where the value of a country's currency is determined by the supply and demand for the currency in the foreign exchange market, without direct government control.

Trade Deficit

A situation where a country's imports of goods and services exceed its exports, leading to more money flowing out of the country than coming in.

Billion

A numerical value equal to 1,000 million in the short scale and 1,000,000 million in the long scale.

Depreciates In Value

The process by which an asset loses value over time.