The risk neutral probability for the up move in last step

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Reference no: EM131930447

D. Consider 6-month spot interest rates evolving in the following three-step binomial tree over 24 months, i.e., with 6 months in each of the next three steps. The current 18-month spot interest rate is 5.15%, the current 12-month spot interest rate is 5.3%, and the current 24-month spot interest rate is 5.45%

1. The risk neutral probability for the up move in the last (third) step.

2. The current fair value of a 18-month European call option with a strike price of $974 written on a 24-month zero coupon bond with face value $1000.

3. . The current fair value of a 12-month European put option with a strike price of $994 written on a 24-month zero coupon bond with face value $1000.

Reference no: EM131930447

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