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Calibrate binomial tree We assume 15% volatility. We will start with a two-year coupon bond that carries a coupon rate of 1.2%. The current one-year

Calibrate binomial tree

We assume 15% volatility.

We will start with a two-year coupon bond that carries a coupon rate of 1.2%.

The current one-year rate is 1%.

The trial rate for Time 1 forward rates is i(1,d)=1.2500%.

image text in transcribed

Time 0 Time 1 Time 2 101.2 101.2 Time 0 Time 1 Time 2 101.2 101.2

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