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

question 17

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 are the holdings in the three-period bond and money market account at time 0 that replicate the floorlet's time 1 payoffs in both the up and down nodes?

• A) -0.499864,0.458009
• B) 0.265009,-0.239428
• C) 0.003198,0.001696
• D) 0.000000,0.006640
• E) 0.003525,0.000000

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Definitions:

Centralized

A system or organizational structure where decision-making and control are concentrated in a single point or at a high level.

Decentralized

Pertains to the distribution of functions, powers, people, or things away from a central location or authority.

Management Structure

The organizational framework that outlines the hierarchy of authority and responsibility within a company.

Organic

Often used to describe farming practices that avoid the use of synthetic fertilizers and pesticides, or organizations and systems that are flexible and adapt to changes naturally.