Calculate the price of a european call option on a bond

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Use the answer to Problem and put-call parity arguments to calculate the price of a put option that has the same terms as the call option in Problem.

Problem :
Suppose that a = 0:05, b = 0:08, and σ = 0:015 in Vasicek's model with the initial short-term interest rate being 6%. Calculate the price of a 2.1-year European call option on a bond that will mature in 3 years.

Suppose that the bond pays a coupon of 5% semiannually. The principal of the bond is 100 and the strike price of the option is 99. The strike price is the cash price (not the quoted price) that will be paid for the bond.

Reference no: EM131241163

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