Compute the price of a european put option

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Reference no: EM131528628

Suppose the risk free rate today is 5% and in the next year the Federal Reserve will either lower the rate to 4% or raise it to 6%. In the risk-neutral world assume each is likely to happen. Compute the price of a European put option on the 2-year bond with face value $100, where the option expires in 1 year and the option's strike price is $90. Recall this means the bond matures 2 years after the option's expiration date and pays the bond holder $100 at the bond's maturity.

Reference no: EM131528628

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