Question
Suppose current 1-year rates are 5% and 2-year rates are 5.5%. Construct an interest rate tree using the BDT model. Assume a volatility parameter of
Suppose current 1-year rates are 5% and 2-year rates are 5.5%. Construct an interest rate tree using the BDT model. Assume a volatility parameter of sigma=12%.
Do not use Excel. Instead construct a tree of estimated values using only "simple arithmetic".(Assume annual rates and annual time steps in this question.)
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Financial Modeling
Authors: Simon Benninga
4th Edition
0262027283, 9780262027281
