Given a variability of (sigma=sqrt{h V_{e}^{A}}=0.10) and current one- and two-period spot rates of (S^{m}{ }_{1}=0.07) and

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Given a variability of $\sigma=\sqrt{h V_{e}^{A}}=0.10$ and current one- and two-period spot rates of $S^{m}{ }_{1}=0.07$ and $S^{m}{ }_{2}=0.0804$ :

a. Generate a one-period binomial interest rate tree using the calibration model. (Hint: Try $S_{d}=0.08148$.)

b. Using the calibrated tree, determine the equilibrium price of a two-period, option-free, $10.5 \%$ coupon bond $(F=100)$.

c. Does the binomial tree price the $10.5 \%$ option-free bond equal to the bond's equilibrium price? Comment on this feature of the calibration model.

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Derivatives Markets And Analysis

ISBN: 9781118202692

1st Edition

Authors: R. Stafford Johnson

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Question Posted: Apr 26, 2024 05:00 AM

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Given a variability of (sigma=sqrt{h V_{e}^{A}}=0.10) and current one- and two-period spot rates of (S^{m}{ }_{1}=0.07) and

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Derivatives Markets And Analysis

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