What does that tell us about how to price the options

Assignment Help Finance Basics

Reference no: EM131290693

(Concept Problem) Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L. The underlying rate is an m-day rate and pays off based on 360 days in a year. Now consider a put option on a $1 face value zero coupon bond that pays interest in the add-on manner (as in Eurodollars) based on the rate L. The exercise rate is X. Show that the interest rate call option with a notional principal of $1 provides the same payoffs as the interest rate put option if the notional principal on the put is $1(1 þ x(m/360)) and its exercise price, X, is $1/(1 þ x(m/360)). If these two options have the same payoffs, what does that tell us about how to price the options?

Reference no: EM131290693

Questions Cloud

Review the k-means clustering algorithm : Review the "k-MEANS CLUSTERING ALGORITHM" section in Chapter 4 of the Sharda et. al. textbook for additional background.

Determine the payoff value of the swaption : At the expiration of the swaption, the LIBOR rates are 10 percent (360 days), 10.5 percent (720 days), 10.9 percent (1,080 days), and 11.2 percent (1,440 days). Assume 360 days in a year. Determine the payoff value of the swaption

Marketing trends impacting school and youth sports : Is the phenomenon of national championships consistent with marketing trends impacting school and youth sports?

Discuss about the ethical implications : COM 540:A discussion of the concept of an "authentic self" online and its relationship to professional identities, supported with research-based principles for each of the examples identified in the Module Three journal assignment,A discussion of t..

What does that tell us about how to price the options : If these two options have the same payoffs, what does that tell us about how to price the options?

Evaluate the risk monitoring and control tools-techniques : Part 1: Research and evaluate the risk monitoring and control tools or techniques. In 3-4 pages, you will describe each tool or technique, evaluate it, and describe how you would integrate the tool or technique into your plan. These tools and tech..

Employee participation for one of proposed retirement plans : In addition to the proposal, management has asked you to design a communication plan that encourages employee participation for one of the proposed retirement plans.

What is the expected time for activity h : What is the expected (estimated) time for activity H? What is the variance for activity H? Based on the calculation of estimated times, what is the critical path? What is the estimated time of the critical path?

Determine your annualized return on the loan : The payoff is based on the exact number of days and a 360-day year. If you have a financial calculator or spreadsheet with an IRR function, determine the internal rate of return and annualize it to determine your annualized return on the loan

User Account

All Pages