Consider the continuous time equivalent of the HoLee model as a degenerate case of the HullWhite model,

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Consider the continuous time equivalent of the Ho–Lee model as a degenerate case of the Hull–White model, where the diffusion process for the short rate r_t under the risk neutral measure Q is given by

dr = 0(t) dt + o d Z.

Show that the parameter θ(t) is related to the slope of the initial forward rate curve through the following formula

: ; (0, T) =r+ ot. a F aT 0(t) =

The bond price function can be shown to admit the affine form where

Show that B(t, T) = e(t,T)-b(t,T)r b(t, T) = T - t a(t, T) = ln B(0, T) B(0, t) + (Tt)F(0, t) -1 (T-1). -

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Mathematical Models Of Financial Derivative

ISBN: 9783642447938

2nd Edition

Authors: Yue-Kuen Kwok

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Question Posted: Dec 04, 2023 05:24 AM

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Consider the continuous time equivalent of the HoLee model as a degenerate case of the HullWhite model,

Question:

drt = 0(t) dt + o d Z₁.

Step by Step Answer:

The HoLee model describes the short rate r as a function of time t and is given by the differential ...View the full answer

Mathematical Models Of Financial Derivative

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