20. Using Monte Carlo, simulate the process dr = a(b r)dt + rdZ, assuming...
Question:
20. 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?
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Derivatives Markets Pearson New International Edition
ISBN: 978-1292021256
3rd Edition
Authors: Robert L. Mcdonald
Question Posted: