Consider the interest rate tree in Table 9.9.
(a) Compute the expected 6-month Treasury rate E[r1].
(b) The 1-year Treasury bill is trading at P0(2) = 97.4845. What is the (continuously compounded) forward rate for the periods i = 1 to i = 2? How does it compare with the expected rate computed in Part (a)? Explain.
(c) Compute the market price of risk λ. Interpret.
(d) Compute the risk neutral probability p*. Interpret.