Question: This problem builds on the previous problem using the same parameters, only valuing a call option instead of a bond. Using Monte Carlo, simulate the

This problem builds on the previous problem using the same parameters, only valuing a call option instead of a bond. Using Monte Carlo, simulate the Vasicek process for 3 years. For each simulation trial, at the end of 3 years, use the Vasicek formula to compute the price of a 1-year zero-coupon bond, P3(3, 4). after 3 years.) For each trial compute max(0, P3(3, 4) − 0.95), and discount this at e −_N i=1 r(i)h, where h is the time step. Take the mean of these calculations and compare your answer to that obtained using the formula in footnote 10. If you have several thousand iterations, it should be close.

Step by Step Solution

★★★★★

3.33 Rating (168 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

Using the formula derived by Jamshidian which is in footnote ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

511-B-C-F-B-V (455).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

Use the addition formula to compute cos (/3+ /4) exactly.

Redo the previous problem using the same data, but now assume that the bond makes its coupon payments annually. Why are the yields you compute lower in this case?

Reconsider the previous exercise. Using the same data but grouping routine with exciting rather than with dull produces the following 2 Ã 2 table: Analyze these data to investigate the...

19. This problem builds on the previous problem using the same parameters, only valuing a call option instead of a bond. Using Monte Carlo, simulate the Vasicek process for 3 years. For each...

1. You are using Vasicek model as the short rate process that is calibrated as: dr(t) = alb r(t))dt + odZ(t) Where a = 0.3, b = 0.05,0 = 0.03. And where Z(t) is a Wiener process under the risk...

Read Chapter 6 of the book "How to measure anything". Now, write a letter to Mr. Williams, starting with the following statement: "Mr. Williams, currently you work with categorical risk metrics...

nodes, but at least its bias can be quantified by Markov Chain L. INTRODUCTION analysis and thus can be corrected via appropriate re-weighting The popularity of online social networks (OSNs) in...

Case Analysis 1. Compute the yield to maturity of Land'o'Toys' bonds before the purchase announcement and use it to determine the likely current bond rating. (Compare YTM to the table on p. 269)....

Describe the meaning of the results and how they answer the research question? An ANOVA approach for accounting for life-cycle uncertainty reduction measures in RBDO: the FSAE brake pedal case study...

Look back to the chapter on qualitative research and find the definition for ethnography. Why is observation such a big part of this important qualitative research approach?

John James had been an installer-repairer for the power company for almost six years. The work kept him outdoors most of the day, and he liked the job, the pay was good, and his coworkers were...

Suppose that the point ( 1 , - 2 ) is on the graph of a function y = f ( x ) . Identify a point which must be on the graphs of the following functions: a ) y = f ( x ) 2 b ) y = f ( x 2 ) c ) y = f (...

3.43 For September, Twiddle & Company worked 600 hours for client A and 1,400 hours for client B. Twiddle bills clients at the rate of $140 per hour; labor cost for its audit staff is $70 per hour....

1. Heating degree-day and cooling degree-day futures contracts make payments based on whether the temperature is abnormally hot or cold. Explain why the following businesses might be interested in...

2. Suppose the businesses in the previous problem use futures contracts to hedge their temperature-related risk. Who do you think might accept the opposite risk?

3. ABC stock has a bid price of $40.95 and an ask price of $41.05. Assume there is a $20 brokerage commission. a. What amount will you pay to buy 100 shares? b. What amount will you receive for...

Butterfly Tractors had $18.00 million in sales last year. Cost of goods sold was $8.80 million, depreciation expense was $2.80 million, interest payment on outstanding debt was $1.80 million, and the...

2. Why is regulation important

4.Solve this math with all deities E The following data give the repair costs (in dollars) For 31} cars randomly selected from a list of cars that were involved in collisions. 2361] 7'50 2500 411]...