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Problem4 The future movement of the one-year spot rate is described by the following binomial lattice in which the length of each time step is taken to be one year. 3.20% 5.1296 2.00% 2.00% 1.25% 0.78% Now let us consider the European call option whose underlying asset is the two-year zero-coupon bond that has the face value of 100. In this problem assume the continuous compounding convention. (a) Assume that the current two-year spot rate is 2.11%. Then draw the binomial lattice which 2 corresponds to the price of the underlying asset. (b) The maturity of the call option is one year and its strike price is 97.5. Then find the replicating portfolio which can duplicate the call option payoff. (c) What is the current call option price? Problem4 The future movement of the one-year spot rate is described by the following binomial lattice in which the length of each time step is taken to be one year. 3.20% 5.1296 2.00% 2.00% 1.25% 0.78% Now let us consider the European call option whose underlying asset is the two-year zero-coupon bond that has the face value of 100. In this problem assume the continuous compounding convention. (a) Assume that the current two-year spot rate is 2.11%. Then draw the binomial lattice which 2 corresponds to the price of the underlying asset. (b) The maturity of the call option is one year and its strike price is 97.5. Then find the replicating portfolio which can duplicate the call option payoff. (c) What is the current call option price

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