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Assume Annual Compounding σ=0.30\sigma = 0.30 What Is the Price of a One-Year Maturity Cap

Question 3

Multiple Choice

Assume annual compounding. The one-year and two-year zero-coupon rates in the BDT model are 6% and 7%. The volatility is given to be σ=0.30\sigma = 0.30 . What is the price of a one-year maturity cap on the one-year interest rate at a strike rate of 8% and a notional of $100?


A) 1.000
B) 1.025
C) 1.050
D) 1.075

Correct Answer:

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