a) Compute the forward rate (f(t, T, S)) in the Ho-Lee model (17.48) with constant deterministic volatility.

Question:

a) Compute the forward rate \(f(t, T, S)\) in the Ho-Lee model (17.48) with constant deterministic volatility.

In the next questions we take \(a=0\).

b) Compute the instantaneous forward rate \(f(t, T)\) in this model.

c) Derive the stochastic equation satisfied by the instantaneous forward rate \(f(t, T)\).

d) Check that the HJM absence of arbitrage condition is satisfied in this equation.

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