Question #11 - Reading 31 Valuation of Contingent Claims

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 5

Status: Unattempted

Correct Answer: B

Shared Context

- Which of the following is closest to the no-arbitrage price of the 5-month T-Bond futures contract? A) $867.20. B) $877.47. C) $976.02.

Question

Comment 1 is best described as:

Answer Choices:

A. correct

B. incorrect as long an interest rate floor should be short an interest rate floor

C. incorrect as long an interest rate floor should be long an interest rate cap

Explanation

For a long call option on a bond, when interest rates decrease, bond prices rise hence call value increases. Similarly, for an interest rate put, when interest rate decreases, the long put value increases.

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