Consider pricing a ly-maturity call option on one unit of the 1y-maturity zero- coupon bond for...

 

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Consider pricing a ly-maturity call option on one unit of the 1y-maturity zero- coupon bond for the strike price of $970 under the Ho-Lee model N; = 0M+G√√M &g where & takes ±1 with equal probabilities of 50%. Let 0-0.01, 0-0.01 and Ar=0.5. Given ()=0.05, (1)=0.055 and F(1.5)=0.058, build a two-step interest-rate tree to price the option. Consider pricing a ly-maturity call option on one unit of the 1y-maturity zero- coupon bond for the strike price of $970 under the Ho-Lee model N; = 0M+G√√M &g where & takes ±1 with equal probabilities of 50%. Let 0-0.01, 0-0.01 and Ar=0.5. Given ()=0.05, (1)=0.055 and F(1.5)=0.058, build a two-step interest-rate tree to price the option.

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To build a twostep interest rate tree for pricing the option under the HoLee model we can use the gi... View the full answer