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Consider a One-Factor HJM Model Where the Initial Forward Curve TT

Question 13

Multiple Choice

Consider a one-factor HJM model where the initial forward curve is given as 6% for one year and 7% between one and two years.The evolution of continuously-compounded one-year forward rates beginning at time TT ,is given by the following binomial process: f(t+1,T) =f(t,T) +α±0.02f ( t + 1 , T ) = f ( t , T ) + \alpha \pm 0.02 ,where the up and down movements are equiprobable.What is the price of a $100 notional one-year floor on the one-year forward rate at a strike rate of 7%.


A) 0.85
B) 0.89
C) 0.95
D) 1.00

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