Consider the Following Table of Prices of Five-Year Semi-Annual Pay

question 7

Multiple Choice

Consider the following table of prices of five-year semi-annual pay caps and floors: $$\begin{array} { | c | c | c | } \hline \text { Strike (\%/) } & \text { Cap price } & \text { Floor price } \\\hline 4 \% & 2.50 & 0.50 \\\hline 5 \% & 1.50 & 1.50 \\\hline 6 \% / & 0.50 & 2.50 \\\hline\end{array}$$ Assume that the caps and floors also include the first payment in 6 months, so there are 10 payment dates in each instrument. The quoted prices of the caps and floors includes this first payment for which the floating leg has already been set. What is the fixed-rate on a five-year fairly priced swap?

• A) 4%
• B) 5%
• C) 6%
• D) Not possible to determine from the available information.

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Definitions:

Different Needs

refers to the varying requirements or desires across individuals or groups, often influencing consumer behavior and product development.

Fair Solution

An outcome or resolution that is just, equitable, and impartial to all parties involved in a dispute or negotiation.

Distributive Fairness

The perceived fairness of outcomes received, often related to resource distribution or the allocation of benefits and burdens.

Guaranteed Reservation

A booking or reservation that guarantees the customer's space will be held until a specified time, providing assurance against overbookings.