Exam: Ch 21 Interest rate options Flashcards
1
Q
What are 2 Exchange-Traded Interest Rate Options
A
- Treasury bond futures options
- Eurodollar futures options
2
Q
What is the issuer of a callable bond able to do?
A
- Issuer has option to buy
bond back at the “call price.” The call price may be a function of time
3
Q
What is the holder of a puttable bond able to do?
A
- Holder has option to sell
bond back to issuer
4
Q
What is blacks model used for?
A
- used to value many
interest rate options
5
Q
What does blacks model assume?
A
- It assumes that the value of an interest rate, a bond price, or some other variable at a particular time T in the future has a lognormal distribution
6
Q
What happens with the payoff from blacks model?
A
- The payoff is discounted from the time of the payoff to today at today’s risk-free rate
7
Q
What is assumed when valuing a European bond option?
A
- that the future bond price is lognormal
8
Q
What should the bond price and strike price in Black’s model be?
A
- should be cash (i.e. dirty)
prices not quoted (i.e. clean) prices
9
Q
What is the cash price?
A
- The cash price is the quoted price plus accrued interest
10
Q
What is an interest rate cap?
A
- A floating rate note where interest rate is reset periodically equal to LIBOR
11
Q
What does a floor provide?
A
- A floor provides payoffs to compensate the holder for situations where LIBOR is below a certain level (the floor rate)
12
Q
What does a cap provide?
A
- A cap provides payoffs to compensate the holder for situations when LIBOR is above above a certain level (the cap rate)
13
Q
What is a tenor?
A
- The time between resets
