Chapter 21 Interest Rate Options 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% What is 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 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 years What would the market assume to be the bond forward price volatility? _ _ _ _ _ _ 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? _ _ _ _ _ _ (a) (b) (c) Which of the following are true (Circle two) A callable bond allows the lender to ask for the principal to be repaid early A puttable bond allows the lender to ask for the principal to be repaid early A swaption that gives the holder the right to receive fixed is equivalent to a put option on a bond where the strike price is the bond’s par value (d) A swaption that gives the holder the right to pay fixed is equivalent to a put option on a bond where the strike price is the bond’s par value