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Suppose a short rate model is given by drt = dWt , where v = 2% annualised. The initial short rate r0 is 6%. 1.

Suppose a short rate model is given by drt = dWt , where v = 2% annualised. The initial short rate r0 is 6%.

1. Construct a 2 step interest rate tree, with steps of one month.

2. Also construct the two step tree of zero coupon bond prices maturing at time 2. ( time 0 = now; time 2 = 2 months later )

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