Question: Consider the risk-neutral Ho-Lee model for continuously compounded rates with a step size of A = 1 year: Pt+1 = r4+0A +OV6+1, where, under the

Consider the risk-neutral Ho-Lee model for continuously compounded rates with a

Consider the risk-neutral Ho-Lee model for continuously compounded rates with a step size of A = 1 year: Pt+1 = r4+0A +OV6+1, where, under the risk-neutral measure, the shock +1, which is realized at time t+1, is given by S+ +1 with probability 0.5 *+1 -1 with probability 0.5 You observe the following information at time t = 0): Volatility is o = 0.015. The price of an one year ZCB with a face value of 100 is 98.04. The price of a two year ZCB with a face value of 100 is 94.26. Using the above information, calibrate your interest rate tree. What is ro, 07 and 11,+ ro + 0* +o? Consider the risk-neutral Ho-Lee model for continuously compounded rates with a step size of A = 1 year: Pt+1 = r4+0A +OV6+1, where, under the risk-neutral measure, the shock +1, which is realized at time t+1, is given by S+ +1 with probability 0.5 *+1 -1 with probability 0.5 You observe the following information at time t = 0): Volatility is o = 0.015. The price of an one year ZCB with a face value of 100 is 98.04. The price of a two year ZCB with a face value of 100 is 94.26. Using the above information, calibrate your interest rate tree. What is ro, 07 and 11,+ ro + 0* +o

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