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Basic Question 2 of 12
An interest rate put option based on a 90-day underlying rate has an exercise rate of 5.5% and expires in 150 days. The forward rate is 5.25% and the volatility is 0.08. The continuously compounded risk-free rate is 4%. Calculate the price of the interest rate put option using the Black model. The notional principal is $10 million.
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan2 | Do not understand the two adjustments. |
| Rotigga | Note the adjustment for step #2 is 90/360, not 90/365. |
| ptyson | the last part of the notes in this section explains it best. |
| Nando1 | Don't worry about it. We're not asked to calculate the model for the exam. |
You have a wonderful website and definitely should take some credit for your members' outstanding grades.
Colin Sampaleanu
Learning Outcome Statements
describe how the Black model is used to value European options on futures;
describe how the Black model is used to value European interest rate options and European swaptions;
CFA® 2025 Level II Curriculum, Volume 5, Module 32.