Using Monte Carlo, simulate the process dr a(b r)dt rdZ, assuming that r 6 , a 0 2, b 0 08, 0 and 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

Question: Using Monte Carlo, simulate the process dr = a(b r)dt + rdZ, assuming that r = 6%, a = 0.2, b = 0.08,

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 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?

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