Question: Consider an interest rate derivative which pays $1 at expiration T if the short rate is greater than 0.01, and pays 0 otherwise. Price this

Consider an interest rate derivative which pays $1 at expiration T if the short rate is greater than 0.01, and pays 0 otherwise. Price this derivative with T = 1 year under the Vasicek model

with r0 = 0.01, Î± = 0.2,Î¼ = 0.01, Ïƒ = 0.05.

(18.54)

Step by Step Solution

★★★★★

3.47 Rating (160 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

1 clear all 2 clc 3 m100 4 n10000 sdt1m 610001 7 a02 amu001 ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

912-B-F-F-M (5111).docx

120 KBs Word File

Students Have Also Explored These Related Finance Questions!

Terry and Maria Redlin have been married for eight years. Terry is an oil rig maintenance supervisor for Holyann Corporation and Maria works as a cashier for Mynards. Terry s birthdate is February 2...

Why would an interest rate derivative be using in a securitization structure?

Why might an interest rate derivative such as an interest rate swap or interest rate cap be used in a securitization transaction for residential mortgage loans?

Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L. The underlying rate is an m-day rate and pays off based on 360 days in a year. Now consider a...

:Solve. Consider an interest rate derivative that pays / at time 7 in a world where the instantaneous short rate / is stochastic, following a random walk. (1) Show that the value of the derivative at...

Question: Analyse to the board and comment on the financial performance of Remy Cointreau based on the three specific areas as follows: identification & assessment of the group interest exposures...

using the Case Study: Remy Cointreau: Dept Management & Yield Curves Analyse to the board and comment on the financial performance of Remy Cointreau based on the three specific areas as follows:...

Problem 10. Answer and Explain 1. Which of the following is not likely a concern pertaining to agency costs? a. Incentive alignment between management and the board of directors b. Incentive...

looking for the solution for this hedging on Porsche case. Recalibrated to PUT USD Euro Sales Currency Spot USD Sales Currency $/ Currency /$ Simulated EUR USD Conversion Risk Currency $/ Put Option...

Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...

1) RiskProof Bank's 10-year corporate bond expected return equals that of 10-year US Treasuries. Which of the following statements is true? A. Riskproof's probability of default is 0. B. Riskproof's...

Explain how to find W. A sample of 1.00 mol water vapor is condensed isothermally to liquid water at 100C and a constant pressure of 1 atm. The standard enthalpy of vaporization of water at 100C is...

Six lead-acid type of secondary cells each of emf 2.0 V and internal resistance 0.015 are joined in series to provide a supply to a resistance of 8.5 Q. What are the current drawn from the supply and...

Question content area top Part 1 For each of the following pairs of Treasury securities ( each with $ 1 , 0 0 0 $ 1 , 0 0 0 par value ) , identify which will have the higher price: a . A three - year...

Mooney Labs had the following payroll for the week ended February 28: Assumed tax rates are as follows: a. FICA: Social Security (employer) 6.2 percent (0.062) and (employee) 4.2 percent (0.042) on...

(a) What does a correlation coefficient tell you? (b) When do you compute r? (c) When do you compute rS? (d) When is linear regression used?

Alan Vitt purchased an iBook G4 laptop computer from Apple, Inc. Shortly after the one- year warranty expired, the laptop failed to work due to a weakness in the product manufacture. Vitt sued Apple,...

Yukon Bike Corp. manufactures mountain bikes and distributes them through retail outlets in Canada, Montana, Idaho, Oregon, and Washington. Yukon Bike Corp. declared the following annual dividends...

Presented on the following pages are partial financial statements for the City of Shenandoah, including: Fiscal year 2017: A. Total Governmental Funds: Balance Sheet Statement of Revenues,...

17. Repeat Problem 16 with all of the data values doubled that is, with these data: 20 80 30 270

List the Four Noble Truths. Explain how they illustrate the practical nature of Buddhist teaching?

Kern Corporation entered into an agreement with its investment banker to sell 10 million shares of the company's stock with Kern netting $210 million dollars from the offering. The expected price to...

Tundra Corporation is interested in acquiring Tantrell Corporation. Tantrell has 2 million shares outstanding and a target capital structure consisting of 40 percent debt. The debt interest rate is 8...

Saved ct Assignment #1 Help 1Improving Communication at Oakdale Hospital of 5 Businesspeople frequently work with large data sets that require them to determine how they will integrate all of that...

es 4. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT? Answer The monthly payments will decline over time. A...

A firm has 10 million shares outstanding with a market price of $25 per share. The firm has $50 million in short-term investments that it plans to use for a stock repurchase, but no other financial...