Use the black model to determine a fair price for the cap

Assignment Help Finance Basics

Reference no: EM131290679

A firm is interested in purchasing an interest rate cap from a bank. It has received an offer price from the bank but would like to determine if the price is fair. The cap will consist of two caplets, one expiring in 91 days and the other in 182 days. They will both have strikes of 7 percent. The forward rate applicable to the first caplet is 8 percent and the forward rate applicable to the second caplet is 8.2 percent. The 91- day risk-free rate is 7.1 percent and the 182-day risk-free rate is 7.3 percent. All rates are continuously compounded. The firm's best estimate of the volatility of forward rates is 16.6 percent. The notional principal is $10 million, and the payoff is based on 90-day LIBOR. Use the Black model to determine a fair price for the cap.

Reference no: EM131290679

Questions Cloud

Identify the ways in which process could challenge security : Identify three ways in which a process could challenge the security of a computer system if not prevented from doing so by the operating system.

Determine the firm’s cash flows on the loan : The current LIBOR is 10 percent. Determine the firm's cash flows on the loan if LIBOR turns out to be 11.35 percent on April 16, 10.2 percent on July 15, and 8.86 percent on October 14. If you have a financial calculator or spreadsheet, determine ..

Knowledge about the hr profession : Using your research skills, textbooks and/or knowledge about the HR profession, describe what you believe to be the most significant trend or challenge facing HRM professions (and why) Finally, before the end of the class week, post a summation st..

Executive decision-making level of most corporations : After having read the "Why We Hate HR" article, enter Forum 1.1 and post your personal critique of this article as well as your position on whether or not you agree or disagree with the author (and most importantly, why)Finally, post a summation s..

Use the black model to determine a fair price for the cap : The firm's best estimate of the volatility of forward rates is 16.6 percent. The notional principal is $10 million, and the payoff is based on 90-day LIBOR. Use the Black model to determine a fair price for the cap.

Business proposal for potential business : Assume you have already completed a business proposal for your potential business. Now, write a cover letter (only) to Angel Investment Group Ltd. seeking financial support for your project.

How is information transmitted : Explain the scientific and technical concepts related to communication.Which types of electromagnetic radiation are typically involved in the process of communication?

Provide a scenario for using point to point topology : Wireless communication, generally, useless three configuration topologies (1) point to point; (2) point to multipoint; and (3) multi-point to point. In this paper, (a) define each topology, (b) provide a scenario for using each topology.

Business activities for a typical company : Identify some of the key processes associated with the following business activities for a typical company: sales and marketing, supply chain management, managing information technology, and managing human resources.

User Account

All Pages