As in Example 2, the one year par rate is 2 000 , the two year par rate is 3 000 , and the three year par rate is 4 000 Consequently, the spot rates are S 0 2 000 , S 1 3 015 , and S 2 4 055 The forward rates are F 0 2 000 , F 1 4 040 , and F 2 6 166 Interest volatility is 15 for all years Calibrat...

Time 0 The par spot and forward rates are all the same for the first period in a binomial tree Consequently Yo So Fo 2000 Time 1 We need to use triala ...

As in Example 2, the one-year par rate is 2.000%, the two-year par rate is 3.000%, and

Question:

As in Example 2, the one-year par rate is 2.000%, the two-year par rate is 3.000%, and the three-year par rate is 4.000%. Consequently, the spot rates are S₀ = 2.000%, S₁ = 3.015%, and S₂ = 4.055%. The forward rates are F₀ = 2.000%, F₁ = 4.040%, and F₂ = 6.166%. Interest volatility is 15% for all years.

Calibrate the binomial tree in Exhibit 17. EXHIBIT 17 Binomial Tree to Calibrate 2.000% ? ? ? ?