17 Using Monte Carlo, simulate the process dr a(b r)dt dZ, 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 Vasicek formula ...

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

Question:

17. 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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