Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume b = 0.05 b=0.05 is a constant for all i i in the BDT model as we assumed in the video lectures. Calibrate the

Assume

b

=

0.05

b=0.05 is a constant for all

i

i in the BDT model as we assumed in the video lectures. Calibrate the

a

i

a

i

parameters so that the model term-structure matches the market term-structure. Be sure that the final error returned by Solver is at most

1

0

8

10

8

. (This can be achieved by rerunning Solver multiple times if necessary, starting each time with the solution from the previous call to Solver.

Once your model has been calibrated, compute the price of a payer swaption with notional $1M that expires at time

t

=

3

t=3 with an option strike of

0

0. You may assume the underlying swap has a fixed rate of

3.9

%

3.9% and that if the option is exercised then cash-flows take place at times

t

=

4

,

...

,

10

t=4,...,10. (The cash-flow at time

t

=

i

t=i is based on the short-rate that prevailed in the previous period, i.e. the payments of the underlying swap are made in arrears.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investments An Introduction

Authors: Herbert B Mayo

9th Edition

324561385, 978-0324561388

More Books

Students also viewed these Finance questions

Question

What is meant by planning or define planning?

Answered: 1 week ago

Question

Define span of management or define span of control ?

Answered: 1 week ago

Question

What is meant by formal organisation ?

Answered: 1 week ago

Question

What is meant by staff authority ?

Answered: 1 week ago