Question: Repeat the previous problem but set 0 05 Be
Repeat the previous problem, but set φ = 0.05. Be sure that you simulate the riskneutral process, obtained by including the risk premium in the interest rate process.
Answer to relevant QuestionsThis problem builds on the previous problem using the same parameters, only valuing a call option instead of a bond. Using Monte Carlo, simulate the Vasicek process for 3 years. For each simulation trial, at the end of 3 ...Suppose the yield curve is flat at 6%. Consider a 4-year 5%-coupon bond and an 8-year 7%-coupon bond. All coupons are annual. a. What are the prices and durations of both bonds? b. Consider buying one 4-year bond and ...Suppose you write a 1-year cash-or-nothing put with a strike of $50 and a 1-year cash-or-nothing call with a strike of $215, both on stock A. a. What is the 1-year 99% VaR for each option separately? b. What is the 1-year ...Repeat the previous problem, only use Monte Carlo simulation. Repeat the previous problem, assuming that default correlations are 0.25.
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