26. An FI manager purchases a zero-coupon bond that has two years to maturity. The...
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26. An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $800 per $1,000 for the bond. The current yield on a one-year bond of equal risk is 9 percent, and the one-year rate in one year is expected to be either 11.60 percent or 10.40 percent. Either rate is equally probable. If the manager buys a one-year option with an exercise price equal to the expected price of the bond in one year, calculate the exercise price of the option. Show calculations
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