Assume b=0.05 is a constant for alliin the BDT model as we assumed in the video lectures.
Question:
Assume
b=0.05
is a constant for alliin the BDT model as we assumed in the video lectures. Calibrate thea
ai parameters so that the model term-structure matches the market term-structure. Be sure that the final error returned by Solver is at most108(This can be achieved by rerunning Solver multiple times if necessary, starting each time with the solution from the previous call to Solver.Once your model has been calibrated, compute the price of a payer swaption with notional $1M that expires at time=
t=3 with an option strike of0
You may assume the underlying swap has a fixed rate of3.9%
and that if the option is exercised then cash-flows take place at times
t=4,...,10 (The cash-flow at timet=i is based on the short-rate that prevailed in the previous period, i.e. the payments of the underlying swap are made in arrears.)
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba