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(a) Consider a payer swap and calculate the price of a two-year European swaption, which...

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Finance

(a) Consider a payer swap and calculate the price of a two-year European swaption, which exercises into a new three-year payer swap with principal $100. The exercise price of the swaption is 10%, the probability of the up state is 30%

(b) Consider a receiver swap and calculate the price of a two-year European swaption, which exercises into a new three-year payer swap with principal $100. The exercise price of the swaption is 10%, the probability of the up state is 30%

t=0 1 2 3 4
i
4 14
3 12 11
2 10 10 8
1 7 8 6 4
0 6 5 4 3 1

.

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