Considering the following SDE for the spot rate: drt = ( rt)dt + rtdWt (19.41) Using
Question:
drt = λ(θ − rt)dt + σrtdWt (19.41)
Using the following set of parameters:
r0 = 0.03 (19.42)
λ = 1.5 (19.43)
θ = 0.06 (19.44)
σ = 0.25 (19.45)
T = 1 (19.46)
write a program to generate a sequence of short rates via simulation. Using this sequence of short rates, calculate the expectation and variance of the bond price.
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Related Book For
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
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