Suppose the bond price B(t, T) satisfies the following PDE: Define the variable V(u) as where s
Question:
Define the variable V(u) as
where λs is the market price of interest rate risk.
(a) Let B(t, T) be the bond price. Calculate the d(BV).
(b) Use the PDE in (21.93) to get an expression for dB(t, T).
(c) Integrate this expression from t to T and take expectations with respect to martingale
equality to obtain the bond pricing formula:
where the expectation is conditional on the current rt, which is assumed to be known.
Transcribed Image Text:
(21.93) (21.94) (21.95) B (t, T (21.96)
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Related Book For
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
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