Suppose you are given the following SDE for the instantaneous spot rate drt r1dWt, where the Wt is a Wiener process under the real world probability and the is a constant volatility The initial spot rate r0 is known to be 5 (a) What does this spot rate dynamics imply (b) Obtain a PDE for a default ...

Consider the process dr t r t dW t with r0 05 a The spot rate dynamics are a martingale under ...

Suppose you are given the following SDE for the instantaneous spot rate: drt = r1dWt, where the

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Suppose you are given the following SDE for the instantaneous spot rate:

drt = σr1dWt,

where the Wt is a Wiener process under the real-world probability and the σ is a constant volatility. The initial spot rate r0 is known to be 5%.

(a) What does this spot rate dynamics imply?

(b) Obtain a PDE for a default-free discount bond price B(t, T) under these conditions.

(d) What is the market price of interest rate risk? Can you interpret its sign?

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An Introduction to the Mathematics of financial Derivatives

ISBN: 978-0123846822

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Authors: Salih N. Neftci

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Question Posted: Aug 17, 2011 10:48 AM

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Suppose you are given the following SDE for the instantaneous spot rate: drt = r1dWt, where the

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An Introduction to the Mathematics of financial Derivatives

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