Question #11

Sam Roit, CFA, has collected the following information on the par rate curve, spot rates, and forward rates to generate a binomial interest rate tree consistent with this data. Maturity Par Rate Spot Rate 1 5% 5.000% 2 6% 6.030% 3 7% 7.097% The binomial tree generated is shown below (one year forward rates) assuming a volatility level of 10%: 0 1 2 5% 7.7099% C A 9.2625% B Riot also generated another tree using the same spot rates but this time assuming a volatility level of 20% as shown below: 0 1 2 5% 8.9480% 13.8180% 5.9980% 9.2625% 6.2088% The one-year forward rate represented by 'A' is closest to: