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

Question 7

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 one-year put option on a two-year 6.5% coupon bond, with a strike price of $100 ex-coupon?


A) 1.00
B) 1.26
C) 1.54
D) 1.67

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