16. Suppose that the yield curve is given by y(t) = 0.10 0.07e 0.12t , and...

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16. Suppose that the yield curve is given by y(t) = 0.10 − 0.07e

−0.12t , and that the short-term interest rate process is dr(t) = (θ(t) − 0.15r(t)) + 0.01dZ. Compute the calibrated Hull-White tree for 5 years, with time steps of h = 1.

a. What is the probability transition matrix Q?

b. What is the price of a 5-year 7.5% interest rate cap on a $1 million notional amount?

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Derivatives Markets Pearson New International Edition

ISBN: 978-1292021256

3rd Edition

Authors: Robert L. Mcdonald

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Question Posted: Jul 22, 2024 09:00 AM

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16. Suppose that the yield curve is given by y(t) = 0.10 0.07e 0.12t , and...

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Derivatives Markets Pearson New International Edition

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