Using Monte Carlo, simulate the process dr = a(b r)dt + rdZ, assuming that r =

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Using Monte Carlo, simulate the process dr = a(b − r)dt + σ√rdZ, assuming that r = 6%, a = 0.2, b = 0.08, φ = 0 and σ = 0.02. Compute the prices of 1-, 2-, and 3-year zero coupon bonds, and verify that your answers match those of the Cox- Ingersoll-Ross formula. What numerical problem can arise in this simulation? How did you address it? Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
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Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

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