CFA Practice Question

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CFA Practice Question

In the binomial interest rate tree, if i1, L is 3%, and the assumed volatility of the one year rate is 10%, the implied forward rate is:

A. 3.24%
B. 3.33%
C. 3.66%
Correct Answer: B

i1, H = i1, Le2σ = 3.66%. The implied forward rate is the mean of the two rates.

User Contributed Comments 2

User Comment
BMarf (3% + 3.66%) / 2 = 3.33%
davidt87 [(2 * 0.1) 2ndLN] * 0.03 = 0.0366
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