Multiple Choice
Use the fact that the pseudo-probability of default at time zero is (1 / 2) to answer the questions that follow. 
-Consider a caplet with maturity time 1 and strike price 0.035.What are the holdings in the three-period bond and money market account at time 0 that replicate the caplet's time 1 payoffs in both the up and down nodes?
A) -0.499864,0.458009
B) 0.265009,-0.239428
C) 0.003198,0.001696
D) 0.000000,0.006640
E) 0.003525,0.000000
Correct Answer:
Verified
Correct Answer:
Verified
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