Repeat the previous problem, but set = 0.05. Be sure that you simulate the risk neutral
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In previous problem Using Monte Carlo, simulate the process dr = a(b − r)dt + σdZ, 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 Vasicek formula.
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We can model a discrete version of equation 2526 It is important not to forget the risk premium a...View the full answer
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