What volatilities were used to construct each tree? (You computed zero-coupon bond prices in the previous problem; now you have to compute the year-1 yield volatility for 1-, 2-, 3-, and 4-year bonds.) Can you unambiguously say that rates in one tree are more volatile than the other?
Answer to relevant QuestionsFor years 2–5, compute the following: a. The forward interest rate, rf , for a forward rate agreement that settles at the time borrowing is repaid. That is, if you borrow at t − 1 at the 1-year rate ˜r, and repay the ...This 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 ...Construct a four-period, three-step (eight terminal node) binomial interest rate tree where the initial interest rate is 10% and rates can move up or down by 2%; model your tree after that in Figure 25.3. Compute prices and ...Assuming a $10m investment in one stock, compute the 95% and 99% VaR for stocks A and B over 1-day, 10-day, and 20-day horizons. Consider two firms, one with an FF rating and one with an FFF rating. What is the probability that after 4 years each will have retained its rating? What is the probability that each will have moved to one of the other two ...
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