PPT Slide

v1(1, 2) = dP0(1, 2)u = 0.3003

P(1) = 61.97

v1(1, 2) = P0(1, 2)u [lm1d + (1 - lm1)] = 0.9193

P(1) = 0.07

v1(1, 2) = dP0(1, 2)d = 0.3038

P(1) = 61.62

v1(1, 2) = P0(1, 2)d [lm1d + (1 - lm1)] = 0.9299

P(1) = 0

Probability of default = 0.01;

Probability of upward interest rate move = 0.5

P(0) = 0.9486 [(1 - 0.01)(0.5 ? 0.0) + 0.5 ? 0)

+ 0.01(0.5 ? 61.97 + 0.5 ? 61.62)] = 0.62