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The current one-period interest rate is 8% and has an equal probability of going up or down by 10% .
a) What is the price of a two period put option on a zero coupon bond that matures in 4 periods, X=0.9
b) What is the price of a two period put option on a 12% coupon bond that matures in 4 periods X=0.95
(Hint: first populate the interest rate tree with the interest rates. E.g. at time t1 the interest rate is 8%, at time t2 the interest rate will go up by 10% i.e. 8 + 0.1x8 = 8.8% or 8 – 0.1x8 = 7.2%, at t3 the interest rates can be 9.68 or 7.92 or 6.48 and so on)
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