Let rt denote the short rate at time t and suppose we have an affine term structure
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where A(t, T) and B(t, T) are deterministic functions of time t and maturity T.
(a) Let f (t; s, s + δ) denote the forward rate at time t for lending between times s and s+δ, where t 0. Compute an expression for f (t; s, s + δ) in terms of rt and the functions A(., .) and B(., .).
(b) Let rs(s + δ) denote the spot rate at time s for lending or borrowing out to time s+δ. Give an expression for rs(s+δ) in terms of rs and the function A(., .) and B(., .).
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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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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