The canonical two-factor Vasicek model for the short rate, r(t), assumes dY1(t) = 1Y1(t)dt + dW1(t) (20.56)

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The canonical two-factor Vasicek model for the short rate, r(t), assumes
dY1(t) = ˆ’Î»1Y1(t)dt + dW1(t) (20.56)

where W1(t) and W2(t) are Q-independent Brownian motions with case account takes as numeraire. Zero-coupon bond prices are then given by

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An Introduction to the Mathematics of Financial Derivatives

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Question Posted: Apr 29, 2016 03:46 PM

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The canonical two-factor Vasicek model for the short rate, r(t), assumes dY1(t) = 1Y1(t)dt + dW1(t) (20.56)

Question:

(20.57) r(t) = δ0 + δ1Yi (f) + δ2Y2(f) (20.58) Z Ele 0tT (20.59) r(s)ds

Step by Step Answer:

By applying Itos lemma to ft Y 1 t Y 2 t we obtain that By ...View the full answer

An Introduction to the Mathematics of Financial Derivatives

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