Suppose the forward rate as a function of time t evolves as where (t,T ) is a
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Suppose the forward rate as a function of time t evolves as
where μ(t,T ) is a deterministic function of t and T . Show that the forward rate is normally distributed, where
Explain why F(t,T )−F(t,S) is purely deterministic. Deduce that the forward rates at different maturities are perfectly correlated.
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The given forward rate evolution equation is dFtT utT dt dZ where FtT is the forward rate at time t ...View the full answer
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