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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. |
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
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.