Assume a Binomial Pricing Model Where There Is an Equal

Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year.

What should be the price of a three-year 5 percent floor if the current (spot) rates are also 6 percent? The face value is $5,000,000,and time periods are zero,one,and two.

A) $8,250.
B) $10,799.
C) $12,550.
D) $15,875.

Correct Answer:

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