Consider the Vasicek model of interest rate

Let r = 5%. Do the following:
(a) Let r0 be the short term interest rate today (you can find this value on any financial newspaper or on the Federal Reserve Web site Choose a small "dt" (e.g. dt = 1/252 = 1 day) and simulate the process over a 5 year period for various choices of γ and σ. Plot the results. How does the process depend on these two parameters?
(b) Fix γ and σ, and simulate the process over a 5 year period for various choices of the initial condition r0. How does the process depend on the initial condition?

Transcribed Image Text:

dre = (F – .)dt + odX,