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1. Risk-Neutral Probabilities We observe the following spot rates and market prices The binomial tree of annualized 6-month short-term interest rates is in the table
1. Risk-Neutral Probabilities We observe the following spot rates and market prices The binomial tree of annualized 6-month short-term interest rates is in the table below. Each period is a 6-month time interval. The true probability of up and down rates changes are equal (1/2) 1a. Construct the bond price tree for a 12-month zero coupon with a par value of $1000. 1b. Find the risk-neutral probability pl of an increase in rates under which the binomial model prices the 1-year zero coupon bond correctly. 1. Risk-Neutral Probabilities We observe the following spot rates and market prices The binomial tree of annualized 6-month short-term interest rates is in the table below. Each period is a 6-month time interval. The true probability of up and down rates changes are equal (1/2) 1a. Construct the bond price tree for a 12-month zero coupon with a par value of $1000. 1b. Find the risk-neutral probability pl of an increase in rates under which the binomial model prices the 1-year zero coupon bond correctly
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