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Business
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Fixed Income Securities
Quiz 9: One Step Binomial Trees
Path 4
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Question 1
Short Answer
What is the risk neutral probability p∗ ofthetreepresented?
Question 2
Essay
Are forward interest rates equal to the market's expectation of future interest rates?
Question 3
Short Answer
Using risk neutral pricing obtain the value for a European option on inter- est rates with maturity at t =0.5, rK =1.5% and payo?: 100 × max(rt ? rK, 0).
Question 4
Essay
You are given the following interest rate tree. Use it when required in the exercises.
-What is a replicating portfolio?
Question 5
Short Answer
Given the tree at the begining of this chapter, what is the value of a zero coupon bond maturing in six months?
Question 6
Essay
Assuming that there is a risk premium in the market (people worry about risk and expect to be compensated for it), is risk neutral probability for an up state (high interest rates) higher, lower or the same as the risk natural probability?