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Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L. The underlying rate is an m-day rate and pays off based on 360 days in a year. Now consider a put option on a $1 face value zero coupon bond that pays interest in the add-on manner (as in Eurodollars) based on the rate L. The exercise rate is X. Show that the in- terest rate call option with a notional principal of $1 provides the same payoffs as the interest rate put option if the notional principal on the put is $1(1 þ x(m/360)) and its exercise price, X, is $1/(1 þ x(m/360)). If these two options have the same payoffs, what does that tell us about how to price the options?
How much money will she have in her bank account after five years and how much money will be in her account after five years?
What is the fair price to pay per share for the option - the price is below $105.00, the option is not exercised.
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