Question: For the one-factor HoLee model, construct a binomial tree with the following parameters: a is 0.07, standard deviation is 0.06, the instantaneous short-rate is 5.50%

For the one-factor Ho–Lee model, construct a binomial tree with the following parameters: a is 0.07, standard deviation is 0.06, the instantaneous short-rate is 5.50% with a drift of 0.02t. If one time period is six months, use the tree to calculate the price of a government zero-coupon bond with a maturity of 1.5 years.

(a) Write down the process that describes the dynamics of the forward rate f(t, T) in the Vasicek model.

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