Questions from Business Statistics

Q: Consider a call option with an exercise rate of x on an

Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L. The underlying rate is an M-day rate and pays off based on 360 days in a year. Now consider a...

Q: Explain how the two types of swaptions are like interest rate options

Explain how the two types of swaptions are like interest rate options and how they are different.

Q: Explain how a bank could use a swaption to hedge the possibility

Explain how a bank could use a swaption to hedge the possibility that it will enter into a pay floating, receive-fixed swap at a later date.

Q: Explain how a forward swap is like a swaption and how it

Explain how a forward swap is like a swaption and how it is different.

Q: The Black–Scholes–Merton option pricing model assumes that stock

The Black–Scholes–Merton option pricing model assumes that stock price changes are log normally distributed. Show graphically how this distribution changes when an investor is long the stock and long...

Q: Suppose you are long a 90-day LIBOR-based FRA

Suppose you are long a 90-day LIBOR-based FRA (receive floating) with notional amount of $50,000,000. At expiration, LIBOR is 4 percent and the strike rate (the agreed-upon rate) is 3 percent. Assumin...

Q: Suppose you are long a 180-day LIBOR-based FRA

Suppose you are long a 180-day LIBOR-based FRA (receive floating) with notional amount of $50,000,000. At expiration, LIBOR is 4 percent and the strike rate (the agreed-upon rate) is 3 percent. Assumi...

Q: Suppose you work on an interest rate derivatives trading desk and observe

Suppose you work on an interest rate derivatives trading desk and observe the following market quotes. Long (short) $100,000,000 interest rate cap, 90/360-day count, 4 percent strike rate priced at $4...

Q: Suppose a firm plan to borrow $5 million in 180 days

Suppose a firm plan to borrow $5 million in 180 days. The loan will be taken out at whatever LIBOR is on the day the loan begins and will be repaid in one lump sum90 days later. The firm would like to...

Q: Assume that on December 2, YY, the cheapest bond to

Assume that on December 2, YY, the cheapest bond to deliver was the 6 1/4s maturing on August 15, YY 18. The March contract is priced at 112, and the conversion factor is 1.0269. The June futures pric...