Consider a one-year caplet on underlying six-month Libor at a strike rate of 6%.If the corresponding floorlet is equal to the caplet in price,what is the current forward rate for the period (1,1.5)years? A) $ 6 \%$ D)Cannot be determined from the given information.

Question

Consider a one-year caplet on underlying six-month Libor at a strike rate of 6%.If the corresponding floorlet is equal to the caplet in price,what is the current forward rate for the period (1,1.5)years?
A) $< 6 \%$
B) $= 6 \%$
C) $> 6 \%$
D)Cannot be determined from the given information.

Quizplus · Accepted Answer

The price of a caplet equals the price of a floorlet when the current forward rate for the period in question is equal to the strike rate. Therefore, if the caplet and floorlet are priced equally, the current forward rate for the period (1, 1.5) years must be equal to the strike rate of 6%.

Consider a One-Year Caplet on Underlying Six-Month Libor at a Strike