Question: Construct an=10 -period binomial model for the short-rate,r i,j . The lattice parameters are:r 0,0 =5% ,u=1.1 ,d=0.9 andq=1q=1/2 . This is the same lattice

Construct an=10

-period binomial model for the short-rate,r

i,j

. The lattice parameters are:r

0,0

=5%

,u=1.1

,d=0.9

andq=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)

is given byh

ij

=ab

ji

2

wherea=0.01

andb=1.01

. Compute the price of a zero-coupon bond with face valueF=100

and recoveryR=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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