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A firm is interested in purchasing an interest rate cap from a bank. It has received an offer price from the bank but would like to determine if the price is fair. The cap will consist of two caplets, one expiring in 91 days and the other in 182 days. They will both have strikes of 7 percent. The forward rate applicable to the first caplet is 8 percent and the forward rate applica- ble to the second caplet is 8.2 percent. The 91- day risk-free rate is 7.1 percent and the 182-day risk-free rate is 7.3 percent. All rates are continuously compounded. The firm's best estimate of the volatility of forward rates is 16.6 percent. The notional principal is $10 million, and the payoff is based on 90-day LIBOR. Use the Black model to determine a fair price for the cap.
By what means can managers use to assess political risk?
Is the total risk of the foreign asset more or less than that of the domestic asset? Is the systematic risk of the foreign asset more or less than that of the domestic asset?
Construct a Stochastic Differential Equation for Y (t). Which value of w would make Y (t) a martingale and evaluate the variance V[Y (t)] and provide the distribution for the increment of Y (t). Does Y (t) keep the properties of the Brownian Motion..
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Discuss this practice from as insurance standpoint what are alternative and assess other financial intermediaries and their capital needs.
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