Question

Suppose that all risk-free (OIS) zero rates are $6.5 \%$ (continuously compounded). The price of a 5 -year semiannual cap with a principal of $$\$ 100$$ and a cap rate of $8 \%$ (semiannually compounded) is $$\$ 3$$. Use DerivaGem to determine: (a) The implied 5-year flat volatility for caps and floors (b) The floor rate in a zero-cost 5 -year collar when the cap rate is $8 \%$. Assume that all 6-month LIBOR forward rates are $6.7 \%$ with semiannual compounding.

   Suppose that all risk-free (OIS) zero rates are $6.5 \%$ (continuously compounded). The price of a 5 -year semiannual cap with a principal of $$\$ 100$$ and a cap rate of $8 \%$ (semiannually compounded) is $$\$ 3$$. Use DerivaGem to determine:
(a) The implied 5-year flat volatility for caps and floors
(b) The floor rate in a zero-cost 5 -year collar when the cap rate is $8 \%$.
Assume that all 6-month LIBOR forward rates are $6.7 \%$ with semiannual compounding.

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 29, Problem 17

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The formula is given by: $$ \text{Price} = \text{Notional} \times \text{Caplet Price} = \text{Notional} \times \text{Caplet Volatility} \times \text{Black's Model Price} $$ where the Caplet Price is given by: $$ \text{Caplet Price} = \text{Notional} \times Show more…

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Suppose that all risk-free (OIS) zero rates are $6.5 \%$ (continuously compounded). The price of a 5 -year semiannual cap with a principal of $$\$ 100$$ and a cap rate of $8 \%$ (semiannually compounded) is $$\$ 3$$. Use DerivaGem to determine: (a) The implied 5-year flat volatility for caps and floors (b) The floor rate in a zero-cost 5 -year collar when the cap rate is $8 \%$. Assume that all 6-month LIBOR forward rates are $6.7 \%$ with semiannual compounding.

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