November 1998
Intermediate to advanced
220 pages
6h 36m
English
Content preview from Fixed Income and Interest Rate Derivative Analysis
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104 FIXED INCOME AND INTEREST RATE DERIVATIVE ANALYSIS
a set of zero-coupon bond prices for a given date. That is
B(0, T) - y" a(0, o, T,
~)
i
The starting interest rate r(0, 0) can simply be chosen to fit the short bill
price. From then on the parameter that controls the general level of interest
rates is the drift parameter m.
The basic procedure is to adjust m in each time period so as to minimize
the squared difference between model and market prices.
6.5 Questions
I. Given the following rate tree, calculate a state price tree.
12%
14%
/
/ \
10%
\ ,/
10%
8%
\
6%
YearO ...
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