Determine the price of a European call option on a 6.5% four-year Treasury bond with a strike…

Determine the price of a European call option on a 6.5% four-year Treasury bond with a strike price of 100.25 and two years to expiration assuming: (1) the arbitrage-free binomial interest-rate tree shown in Exhibit 27-11 (based on a 10% volatility assumption), and (2) the price of the Treasury bond two years from now shown at each node.

 

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