Question #28
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 12
Status: Unattempted
Correct Answer: B
Question
For a 1-year quarterly-pay swap, an equivalent position with short puts and long calls would involve:
Answer Choices:
A. three put-call combinations expiring on the first three settlement dates of the swap
B. put-call combinations expiring on each of the four settlement dates
C. three put-call combinations on the last three settlement dates of the swap
Explanation
Interest rate options pay one period after exercise. Options expiring on settlements at t =
1,2,3, will mimic the uncertain swap payments at t = 2,3,4.