There are six half year periods on a forward curve The curve is currently flat at 6 , and you are given the following declining volatility curve (a) What feature of interest rates might result in the volatility curve declining so sharply (b) Solve for the two forward curves a half year ahead, and p...

a The volatility curve may decline sharply when there is very high mean reversion ...

There are six half-year periods on a forward curve. The curve is currently flat at 6%, and

Question:

There are six half-year periods on a forward curve. The curve is currently flat at 6%, and you are given the following declining volatility curve:

0.06 0.05 0.04 0.03 0.02 0.01

(a) What feature of interest rates might result in the volatility curve declining so sharply?

(b) Solve for the two forward curves a half-year ahead, and plot each of them. What effect does the declining volatility have on the two curves in the next period?

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Derivatives Principles And Practice

ISBN: 9780078034732

2nd Edition

Authors: Rangarajan Sundaram

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Question Posted: Jan 18, 2024 05:00 AM

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There are six half-year periods on a forward curve. The curve is currently flat at 6%, and

Question:

0.06 0.05 0.04 0.03 0.02 0.01

Step by Step Answer:

a The volatility curve may decline sharply when there is very high mean reversion ...View the full answer

Derivatives Principles And Practice

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