Construct an = 10 n=10-period binomial model for the short-rate,r_{i,j} ri,j . The lattice parameters are:r_{0,0}= 5%
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Question:
Construct an = 10
n=10-period binomial model for the short-rate,r_{i,j}
ri,j
. The lattice parameters are:r_{0,0}= 5\%
r0,0
=5%,u=1.1
u=1.1,d=0.9
d=0.9andq=1-q=1/2
q=1q=1/2. This is the same lattice that you constructed in Assignment 5.
Assume that the 1-step hazard rate in node(i,j)
(i,j)is given byh_{ij} = a b^{j-\frac{i}{2}}
hij
=abj2
i
wherea = 0.01
a=0.01andb = 1.01
b=1.01. Compute the price of a zero-coupon bond with face valueF = 100
F=100and recoveryR = 20\%
R=20%.
Submission Guideline:Give your answer rounded to two decimal places. For example, if you compute the answer to be 73.2367, submit 73.24.
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