Whether any convexity or timing adjustments are necessary

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Reference no: EM131241076

Explain whether any convexity or timing adjustments are necessary when:

(a) We wish to value a spread option that pays off every quarter the excess (if any) of the 5-year swap rate over the 3-month LIBOR rate applied to a principal of $100. The payoff occurs 90 days after the rates are observed.

(b) We wish to value a derivative that pays off every quarter the 3-month LIBOR rate minus the 3-month Treasury bill rate. The payoff occurs 90 days after the rates are observed.

Reference no: EM131241076

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