Calculate the price of an option that caps the 3-month rate, starting in 15 months time
Chapter 29, Problem 29.5(choose chapter or problem)
Calculate the price of an option that caps the 3-month rate, starting in 15 months time, at 13% (quoted with quarterly compounding) on a principal amount of $1,000. The forward interest rate for the period in question is 12% per annum (quoted with quarterly compounding), the 18-month risk-free interest rate (continuously compounded) is 11.5% per annum, and the volatility of the forward rate is 12% per annum.
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