Suppose that the yield curve is given by y(t) = 0.10 0.07e 0.12t , and that

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Suppose that the yield curve is given by y(t) = 0.10 − 0.07e −0.12t , and that the short-term interest rate process is dr(t) = (θ(t) − 0.15r(t)) + 0.01dZ. Compute the calibrated Hull-White tree for 5 years, with time steps of h = 1.

a. What is the probability transition matrix Q?

b. What is the price of a 5-year 7.5% interest rate cap on a $1 million notional amount?

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Derivatives Markets

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Authors: Robert McDonald

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Question Posted: Aug 12, 2015 02:58 AM

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Suppose that the yield curve is given by y(t) = 0.10 0.07e 0.12t , and that

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a The probability transition matrix looks as follows 1 2 3 4 5 1 07616667 01766667 006166667 000000...View the full answer

Derivatives Markets

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