Use the black model to determine a fair price for the cap

Assignment Help Financial Management

Reference no: EM131323351

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 applicable 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.

Reference no: EM131323351

Questions Cloud

Determine the probability or impact level : How do you determine the probability or impact level of a risk in a risk register?

How much the bank should receive for selling the call : All rates are continuously compounded. Use the Black model to determine how much the bank should receive for selling this call for every $1 million of notional principal.

Determine the number of units required for breakeven : Reconsider the firm described when it is determined that fixed costs have delined to $30,000 and the firm has determined by studies that it can only expect to sell 60 units this year. What price should it select to ensure selling the 60 units profita..

Examples of transferring risk : 1. What are some examples of transferring risk? 2. Who is more important at managing risk? The project manager or individual team members?

Use the black model to determine a fair price for the cap : 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.

Determine the payoff value of the swaption : Consider a three-year receiver swaption with an exercise rate of 11.75 percent, in which the underlying swap is a $20 million notional principal four-year swap.- Determine the payoff value of the swaption.

Agree that diverse teams and organizations : We all seem to agree that diverse teams and organizations are a good thing. So why do we have so much trouble building them?

Demand for pizzas elastic or inelastic : Yesterday, the price was $5 per pizza, and John was willing to buy 5 pizzas. Today, the price has gone up to $7, and John is now willing to buy only 3 pizzas. What is John's elasticity of demand? Is John's demand for pizzas elastic or inelastic?

Reviewing the budget report of a project : a. In reviewing the budget report of a project, you notice that spending on the project is running about ten percent over the plan. Is the project in trouble? Why or why not?

User Account

All Pages