Multiple Choice
Suppose that the one-year and two-year zero-coupon rates are 6% and 7%, respectively (assume continuous compounding) . After one year, let the one-year zero-coupon rate move down to 4% or up to 9%. What must be the probability of the up move for the rates to be arbitrage-free?
A) 0.20
B) 0.25
C) 0.50
D) 0.60
Correct Answer:
Verified
Correct Answer:
Verified
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