Exam 21: Interest Rate Options

What is assumed to be lognormal in the standard market model for valuing the following? i) A bond option _ _ _ _ _ _ _ ii) A caplet _ _ _ _ _ _ iii) A swaption _ _ _ _ _ _

A bond's yield is 5% and the forward yield volatility is quoted as 20%. The modified duration of the bond at the maturity of the option is 6 years. What would the market assume to be the bond forward price volatility? _ _ _ _ _ _

Which of the following are true? choose two)

A 10-year interest rate cap has a cap rate of 4%, quarterly resets, and a notional principal of $1 million. i) How many caplets are there underlying the cap? _ _ _ _ _ _ ii) Suppose the three-month interest rate at time 2.5 years is 5.2% per annum. What is the payoff on the interest rate cap resulting from this? _ _ _ _ __ iii) At what time measured in years from today) would the payoff in ii) be made? _ _ _ _ _ _

A Eurodollar futures option contract has a strike price of 97 and the Eurodollar interest rate is 2.50%. i) What is the intrinsic value of the contract if the option is a call? _ _ _ _ _ _ ii) What is the intrinsic value of the contract if the option is a put? _ _ _ _ _ _