Consider a One-Year Caplet on Underlying Six-Month Libor at a Strike

question 13

Multiple Choice

Consider a one-year caplet on underlying six-month Libor at a strike rate of 6%. If the corresponding floorlet is equal to the caplet in price, what is the current forward rate for the period (1,1.5) years?

• A) \(< 6 \%\)
• B) \(= 6 \%\)
• C) \(> 6 \%\)
• D) Cannot be determined from the given information.

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Definitions:

Two-Factor Theory

A theory, also known as Schachter-Singer theory, that emotional experience arises from a combination of a state of arousal and a cognitive label for that arousal.

Autonomic Nervous System

The part of the nervous system that controls involuntary body functions such as heartbeat, digestion, and respiration.

Automatic Emotional Responses

Immediate, subconscious reactions to stimuli that involve emotions, such as feeling scared when hearing a loud noise.

Thalamus

A part of the brain that acts as a relay station for sensory information, excluding smell, directing it to the appropriate areas of the brain for processing.