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6. a. Write a function to approximate the change of an arbitrary function f() with respect to a small change in X, say dx, via
6. a. Write a function to approximate the change of an arbitrary function f() with respect to a small change in X, say dx, via its Taylor's series expansion: For any infinitely differentiable function f(-), one can write df (x) 1 dm f(x) 1 dn+1(E) f(x+4x) = f(x)+ -Ax+ (4x)" + dx 2 dx2 n! dxn 1d-f(x) (Ac)+...+ (n +1)! dxn+1(4x)n+1, I where E (2x, X + Ax). Comment on the differences between the true and the approximation values as a function of the number of terms included in the expansion. b. Using Taylor's series expansion, or otherwise, justify the following approximation: P(y) - P(y + dy) -D(dy), and P(y + dy) ~ P(y){1 D* (dy)}, where D and D* denote the dollar duration and the modified duration for a bond P(y) with yield y. You should also argue why the bond price can be infinitely differentiable with respect to y if you make use of the result in (a) to support your claim. Illustrate the approximation via a figure with R and/or Python. 6. a. Write a function to approximate the change of an arbitrary function f() with respect to a small change in X, say dx, via its Taylor's series expansion: For any infinitely differentiable function f(-), one can write df (x) 1 dm f(x) 1 dn+1(E) f(x+4x) = f(x)+ -Ax+ (4x)" + dx 2 dx2 n! dxn 1d-f(x) (Ac)+...+ (n +1)! dxn+1(4x)n+1, I where E (2x, X + Ax). Comment on the differences between the true and the approximation values as a function of the number of terms included in the expansion. b. Using Taylor's series expansion, or otherwise, justify the following approximation: P(y) - P(y + dy) -D(dy), and P(y + dy) ~ P(y){1 D* (dy)}, where D and D* denote the dollar duration and the modified duration for a bond P(y) with yield y. You should also argue why the bond price can be infinitely differentiable with respect to y if you make use of the result in (a) to support your claim. Illustrate the approximation via a figure with R and/or Python
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