Consider the following SDE for the spot rate: drt = rtdWt. (a) Write a program that simulates
Question:
(a) Write a program that simulates a path for rt by simulating dWt. Assume r0 = 0.01, T = 2.0 and ∆ = 0.05. Calculate the expectation of the terminal spot rate, rT.
(b) Solve the given SDE and repeat the above simulation by simulating a single Wt along each path. As above, calculate the expectation of the terminal spot rate, rT.
(c) Show empirically that these two simulation methods converge as the number of draws increases and comment on their relative efficiency.
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a The following code can be used to calculate the expected value of the terminal spot rate using the ...View the full answer
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Related Book For 
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
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