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(1) Given the prices of zero coupon bonds Z(0, 1) = 0.9865, Z(0, 1.5) = 0.9581,...

(1) Given the prices of zero coupon bonds Z(0, 1) = 0.9865, Z(0, 1.5) = 0.9581, Z(0, 2) = 0.9292, and Z(0, 2.5) = 0.9003, determine the following forward LIBORs L0[1, 1.5], L0[1.5, 2], and L0[2, 2.5].

(2) Continued from the last problem, further assume that the floor rate (strike) is 6.5%. The principal underlying the floor is $1,000,000 and the reset frequency is 6 months. Assume that the volatility is 20%. Determine the price of floor from 1 to 2 years.

Solutions

Expert Solution

Here, in 1st question prices of Zero-coupon Bonds are given, we have to use this information and calculate prices of Forward LIBORs for the period asked above.

I have solved the above problem in the notebook, kindly see the below image for solution.

jeff jeffy answered 1 year ago
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