What does the calibration of a one-factor term structure model involve? 28.20 Use the DerivaGem software to
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What does the calibration of a one-factor term structure model involve? 28.20 Use the DerivaGem software to value 1x4, 2x3, 3x 2, and 4x 1 European wwwp options to receive fixed and pay floating. Assume that the 1-, 2-, 4-, and 5-year interest rates are 6%, 5.5%, 6%, 6.5%, and 7%, respectively. The payment frequency on the swap is semiannual and the fixed rate is 6% per annum with semiannual compound- ing Use the Hull-White model with a 3% and 1%. Calculate the volatility implied by Black's model for each option 28.22 Construct a trinomial tree for the Ho-Los model where a002. Suppose that the the initial zero-coupon interest rate for a maturifies of 0.5, 10, and 1.5 years are 7.5%, 8%, and 8.5%. Use two time steps, each 6 months long. Calculate the value of a zero-coupon bond with a face value of $100 and a remaining life of 6 months at the ends of the final nodes of the tree. Lise the tree to value a 1-year European put option with a strike price of 95 on the bond. Compare the price given by your tree with the analytic price given by DerivaGem
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