Assume annual compounding.The one-year and two-year zero-coupon rates in the BDT model are 6% and 7%.The volatility is given to be $\sigma = 0.30$ .What is the price of a one-year maturity call option on a 7.5% coupon (annual pay)bond at a strike of $100 (ex-coupon)?
A)0.80
B)0.90
C)1.00
D)1.10

Question

Quizplus · Accepted Answer

The correct answer is A.The price of a one-year maturity call option on a 7.5% coupon (annual pay) bond at a strike of $100 (ex-coupon) is 0.80. This is because the bond is trading at a premium to its par value, and the call option gives the holder the right to buy the bond at a price below its market value.

Assume Annual Compounding σ=0.30\sigma = 0.30σ=0.30 What Is the Price of a One-Year Maturity Call Option

Assume Annual Compounding $\sigma = 0.30$ What Is the Price of a One-Year Maturity Call Option