PDA

View Full Version : ASM example 16B

yesactuary
03-27-2009, 10:06 PM
In example 16B, "The interest rate for the first year is (1/0.94)-1=0.06383 < 0.07, so there is no immediate payment on the cap. We must value the caplets for the 2nd and 3rd year...".

Like we calculated the interest rate for the 1st year. Here is how I calculated the interest rates for 2nd and 3rd year:

The bond price is (1/(1+R))^n.

For 2nd year: R=(1/0.88)^(1/2)-1=0.066
For 3rd year: R=(1/0.82)^(1/2)-1=0.068

Thus, these rates are both under cap rate 0.07, and there shouldn't be any payments on the cap. I don't think I'm right on this. There must be something I don't understand correctly. Could someone help me out here? Thanks a lot!

JohnLocke
03-27-2009, 10:08 PM
not enough info, or I'm a retard. Both scenarios are equally likely.

Abraham Weishaus
03-28-2009, 11:55 PM
If an option due one or two years from now is currently out-of-the-money, does that make it worthless?

yesactuary
03-29-2009, 09:35 AM
If an option due one or two years from now is currently out-of-the-money, does that make it worthless?