OPTION PRCING QUESTION (SCHWESER)

This question seems very simple. But, unfortunately, my solution is different from answer. Any suggestions? Reichmann long a floating rate bond. if he want to hedge his long poison in the floating rate bond against declining rates, he would? A short Eurodollar future contract b long the contract. My answer is A This guy (again) uses a binomial interest rate model to value 1 year and 2 year 6% floors on 1 year LIBOR, both based on \$30 million principal value with annual payments. He values the 1 year at \$90000, and the 2 year floor at \$285000 so , based on this, the 2 year \$30 million European put option on LIbor with a floor strike of 6% is closest to ? A 195000 b 375000? My answer is B any suggestions?

to answer part b, a 2 year floor is actually a combination of individual floorlet, it has a 1 year put and a 2 year put in it, in this case, 2 put contract so 2 year put option is 285000-90000, you have 195000 as for the first part I would go with A as well, unless this guy’s long position in bond is not based on libor.

Schjew, It does look like A then B. Does it give any explanation?