Chapter 21 Interest Rate Options

8) Which of the following is assumed to be lognormal when a swap option is valued?

A) A future bond price

B) A future swap rate

C) A future short-term rate

D) A future bond yield

9) Which of the following is assumed to be lognormal when a bond option is valued?

A) A future bond price

B) A future swap rate

C) A future short-term rate

D) A future bond yield

10) Which of the following is assumed to be lognormal when a caplet is valued?

A) A future bond price

B) A future swap rate

C) A future short-term rate

D) A future long-term rate

11) At the maturity of a bond option, it is estimated that the underlying bond will have a duration of 6 years and a yield of 5%. The forward yield volatility is quoted as 25%. What is the volatility of the forward bond price?

A) 3%

B) 30%

C) 20.8%

D) 7.5%

12) A Eurodollar futures option contract has a strike price of 97 and the Eurodollar interest rate is 2.50%. What is the intrinsic value of the contract if the option is a call?

A) $0

B) $1,250

C) $1,750

D) $2,500

13) A Eurodollar futures option contract has a strike price of 97 and the Eurodollar interest rate is 2.50%. What is the intrinsic value of the contract if the option is a put?

A) $0

B) $1,250

C) $1,750

D) $2,500

14) A ten year interest rate cap has quarterly resets. How many caplets does the cap consist of?

A) 38

B) 39

C) 40

D) 41