The one-year and two-year risk-free rates (yields) are 1% and 1.025%, respectively. Our model of the term structure says that one year from now the one-year interest rate will be one of the following two values: 0.01 or 0.01*u, where u is the up factor. Here, the rates are the effective annual rates, so that one dollar invested in a T-bond returns (1+r)^T dollars, where T is measured in years. The model also says that the risk-neutral probabilities of these two possibilities are the same, equal to 1/2.
Enter the price of the one-year European put option written on the two-year risk-free zero coupon bond paying 100 at maturity, with strike price 98.95
3 answers
I can not figure this out! has anyone got it?
Yeah I got it, but I am not going to give it. If you can't do it yourself then you don't deserve to pass the exam
This is very true, I haven't got the answer, but the exam finishes today. I am not interested in using it to pass, but I would like to see the working (if possible, when the exam is finished!)