Suppose that the short rate, r, is 10% and its real-world process is dr = 0.25(0.07

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Suppose that the short rate, r, is 10% and its real-world process is dr = 0.25(0.07 − r)dt + 0.045dz while the risk-neutral process is dr = 0.25(0.15 − r)dt + 0.045dz

1) What is the market price of interest rate risk?

2) What is the expected return and volatility for a 3-year zero-coupon bond in the risk neutral world?

Related Book For answer-question

Options Futures and Other Derivatives

ISBN: 978-0134472089

10th edition

Authors: John C. Hull

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Posted Date: Oct 17, 2020 11:45 PM

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Suppose that the short rate, r, is 10% and its real-world process is dr = 0.25(0.07

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Answera The risk neutral process for r has a drift rate which is 002r higher ... View the full answer

Options Futures and Other Derivatives

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