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Principles of Financial Engineering, 3rd Edition by Elsevier Science

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image (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(t1,t2)1=F(t0,t2)+σ2F(t0,t2)ΔW13 (14.97)

image (14.97)

F(t2,t2)1=F(t1,t2)1+σ2F(t1,t2)1ΔW23 (14.98)

image (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 ...

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