Consider a One-Factor HJM Model Where the Initial Forward Curve $T$

question 10

Multiple Choice

Consider a one-factor HJM model where the initial forward curve is given as 6% for one year and 7% between one and two years. The evolution of continuously-compounded one-year forward rates beginning at time $T$ , is given by the following binomial process: $f ( t + 1 , T ) = f ( t , T ) + \alpha \pm 0.02$ , where the up and down movements are equiprobable. What is the price of a $100 notional one-year floor on the one-year forward rate at a strike rate of 7%.

• A) 0.85
• B) 0.89
• C) 0.95
• D) 1.00

---

Definitions:

Serotonin

A neurotransmitter that plays a key role in regulating mood, appetite, and sleep among other functions.

Pessimistic Attitude

A tendency to focus on the negatives of a situation or to expect the worst possible outcome.

Biological Perspective

An approach in psychology focusing on understanding human and animal behavior through biological processes, including genetics, the brain, and the nervous system.

Face Validity

The extent to which a test item appears to fit the particular trait it is measuring.