Test bank fundamentals of futures and options markets 7e by hull chapter 21

Chapter 21
Interest Rate Options
1. A 10-year interest rate cap has a cap rate of 4%, quarterly resets, and a notional principal
of $1 million
(i) How many caplets are there underlying the cap _ _ _ _ _ _
(ii) Suppose the three-month interest rate at time 2.5 years is 5.2%. What is payoff on the
interest rate cap resulting from this?
_ _ _ _ __
(iii)At what time (measured in years from today) would the payoff in (ii) be made
______

2. What is assumed to be lognormal in the standard market model for valuing the following?
(i) A bond option _ _ _ _ _ _ _
(ii) A caplet _ _ _ _ _ _
(iii)A swaption _ _ _ _ _ _
3. A bond’s yield is 5% and the forward yield volatility is quoted as 20%. The modified
duration of the bond at the maturity of the option is 6 years. What would the market
assume to be the bond forward price volatility? _ _ _ _ _ _
4. A Eurodollar futures option contract has a strike price of 97 and the Eurodollar interest
rate is 2.50%.
(i) What is the intrinsic value of the contract if the option is a call? _ _ _ _ _ _
(ii) What is the intrinsic value of the contract if the option is a put? _ _ _ _ _ _
5.
(a)
(b)
(c)

Which of the following are true. (Circle two)
A callable bond allows the lender to ask for the principal to be repaid early
A puttable bond allows the lender to ask for the principal to be repaid early
A swaption that gives the holder the right to receive fixed is equivalent to a put option on

a bond where the strike price is the bond’s par value
(d) A swaption that gives the holder the right to pay fixed is equivalent to a put option on a
bond where the strike price is the bond’s par value