AssignmentThreeAnswers - The payoff of the floor at time...

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1. a) 1. b) I have implemented the backwards recursion approach using Microsoft Excel. Each node shows the value of the bond at time t , t = 0,1,2,3,4. 106 Facevalue q 97.24771 106 100 0.5 96.44126 99.06542 106 Coupon 97.40638 100.0084 100.9524 106 6 100.0771 102.757 103.7813 102.9126 106 The price of the bond is \$100.08. 1. c) This lattice shows

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Unformatted text preview: . The payoff of the floor at time t, (for t = 0,1,2) if exercised. Floor ( K ) Q 0 0.06 0.5 0 0 Nominal Amount ( L ) Reset( ) 0 10 20 1000 1 This lattice shows the value of the floor at time t. 0 0 0 9.209344 19.52381 20 The price of the floor is \$9.21 1. d) Arrow-Debreu Prices 1. e) Pricing the floor Using Arrow-Debreu prices This agrees with our previous results....
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This note was uploaded on 02/23/2012 for the course ACTSC 445 taught by Professor Christianelemieux during the Fall '09 term at Waterloo.

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AssignmentThreeAnswers - The payoff of the floor at time...

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