In the Ho & Lee (1986) Model, Assume That the Initial

question 24

Multiple Choice

In the Ho & Lee (1986) model, assume that the initial curve of zero-coupon rates for one and two years is 6% and 7%, respectively. Assume that the probability of an upshift in discount functions is equal to that of a downshift. If the parameter $\delta = 0.95$ , then the price of a one-year maturity call option on a two-year $100 face value zero-coupon bond in the up node after one year at a strike of $92 will be

• A) 1.10
• B) 1.20
• C) 1.30
• D) 1.40

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Definitions:

Mesozoic Era

A major subdivision of geologic time from 251 million years ago (Ma) to 65 Ma; characterized by dinosaurs.

Jurassic Period

A geologic period and system that occurred about 201 to 145 million years ago, known for the prevalence of dinosaurs and the breakup of the supercontinent Pangea.

Numeric Age

Geologic age of a rock, sediment, fossil, or event calculated in thousands, millions, or billions of years before present; synonym: absolute age.

Actual Age

The precise age or date of an object or event, usually determined through radiometric dating or other scientific methods.