Explain why in practice arbitrage-free models are typically used rather than equilibrium models.
Answer to relevant QuestionsAnswer the below questions. (a) What is the empirical evidence on the relationship between volatility and the level of interest rates? (b) Explain whether the historical evidence supports the use of a normal model or a ...What is the commonly used mathematical tool for describing the movement of interest rates that can incorporate the properties of an interest-rate model? What are the two drawbacks of the traditional approach to the valuation of bonds with embedded options? The following excerpt is taken from an article titled “Call Provisions Drop Off” that appeared in the January 27, 1992, issue of BondWeek, p. 2: “Issuance of callable long-term bonds dropped off further last year as ...Explain why you agree or disagree with the following statement: “The value of a putable bond is never greater than the value of an otherwise comparable option-free bond.”
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