Principles of Financial Engineering, 3rd Edition

(14.96)

with a pseudo-random number generator, and then calculate, sequentially, the randomly generated forward rates in the following order, starting with the observed F(t₀, t₂)

$F{(t_1,t_2)}^1=F(t_0,t_2)+{\sigma }_{2}F(t_0,t_2)\mathrm{\Delta }{W}_1^3$ (14.97)

(14.97)

$F{(t_2,t_2)}^1=F{(t_1,t_2)}^1+{\sigma }_{2}F{(t_1,t_2)}^1\mathrm{\Delta }{W}_2^3$ (14.98)

(14.98)

where the superscript on the left-hand side indicates that these values are for the first Monte Carlo trajectory. Proceeding sequentially, all the terms on the right-hand ...