Question #10
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 4
Status: Unattempted
Correct Answer: B
Question
Writing a series of interest-rate puts and buying a series of interest-rate calls, all at the same exercise rate, is equivalent to:
Answer Choices:
A. being the floating-rate payer in an interest rate swap
B. being the fixed-rate payer in an interest rate swap
Explanation
A short position in interest rate puts will have a negative payoff when rates are below the
exercise rate; the calls will have positive payoffs when rates exceed the exercise rate. This
mirrors the payoffs of the fixed-rate payer who will receive positive net payments when
settlement rates are above the fixed rate.
(Module 30.6, LOS 30.e)
Typesetting math: 100%