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2. Assume the following input for the BDT model. Years to Zero-Coupon Zero-Coupon Maturity Rates (%) Volatilities (%) 1 6.0 30.0 2 6.5 26.0 3

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2. Assume the following input for the BDT model. Years to Zero-Coupon Zero-Coupon Maturity Rates (%) Volatilities (%) 1 6.0 30.0 2 6.5 26.0 3 7.0 22.0 4 7.5 20.0 The zero rates are quoted per annum with annual compounding. From the rates and volatilities given above, calibrate a 1-period BDT tree for short rates, i.e. find the two possible rates at the end of one year

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