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 $\sigma = 0.30$ . What is the price of a one-year maturity call option on a 7.5% coupon (annual pay) bond at a strike of $100 (ex-coupon)?
A) 0.80
B) 0.90
C) 1.00
D) 1.10

Question

Quizplus · Accepted Answer

The correct answer is A.The price of a one-year maturity call option on a 7.5% coupon (annual pay) bond at a strike of $100 (ex-coupon) is 0.80. This is because the bond is trading at a premium to its par value, and the call option gives the holder the right to buy the bond at a price below its market value.

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

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