4. (4 points) Within the framework of the Ho-Lee model, you have estimated the following...
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4. (4 points) Within the framework of the Ho-Lee model, you have estimated the following continuously-compounded interest rate tree, with the time interval between two movements being A = 1 year: t: 0 1 2 4% 3% 2% 2% 1% 0.5% Price a cap with a notional of $100 and an annually-compounded strike rate of 1%. The first cash flow of the cap is paid at t=1, and its last cash flow is paid at t=3. The cap pays its cash flows annually. 4. (4 points) Within the framework of the Ho-Lee model, you have estimated the following continuously-compounded interest rate tree, with the time interval between two movements being A = 1 year: t: 0 1 2 4% 3% 2% 2% 1% 0.5% Price a cap with a notional of $100 and an annually-compounded strike rate of 1%. The first cash flow of the cap is paid at t=1, and its last cash flow is paid at t=3. The cap pays its cash flows annually
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