This preview shows page 1. Sign up to view the full content.
Unformatted text preview: b) Now consider an HJM model, driven by the risk-neutral Brownian motion f W , in which the volatility ( t, T ) is of the form ( t, T ) = g ( t ) h ( T ) for two bounded and strictly positive deterministic functions g and h . Write down the dynamics of the forward rates f ( t, T ) and of the short rate R t = f ( t, t ) under the risk-neutral measure. Then Fnd deterministic functions ( t ), ( t ), and ( t ) such that R t satisFes dR t = ( t )( ( t ) R t ) dt + ( t ) d f W t . That is, R t solves the SDE of a general one-factor Hull & White model. Exercise 2. Exercise 10.9 on page 458 in Steve Shreves book. 1...
View Full Document
This note was uploaded on 08/05/2008 for the course ORIE 569 taught by Professor Alexanderschied during the Spring '08 term at Cornell University (Engineering School).
- Spring '08