Suppose that the one-year and two-year zero-coupon rates are 6% and 7%, respectively (assume continuous compounding) . After one year, let the one-year zero-coupon rate move down to 4% or up to 9%. What must be the probability of the up move for the rates to be arbitrage-free?
A) 0.20
B) 0.25
C) 0.50
D) 0.60
Correct Answer:
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Q2: "Equilibrium" models of the term-structure
A) Are
Q3: A $100 face value one-year risk-free discount
Q4: Which of the following statements is implied
Q5: A $100 face value one-year risk-free
Q6: A $100 face value one-year risk-free discount
Q7: In the Black-Scholes framework, return volatility is
Q8: The term "no-arbitrage" class of term-structure models
Q9: A $100 face value one-year risk-free discount
Q10: Which of the following is not sufficient
Q11: In the Black-Scholes formula, interest rates are
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