This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: (d) Compute the Arrow-Debreu prices A ( t, n ), t = 0 , ..., 3, n = , ..., t . (e) Demonstrate how you could use the Arrow-Debreu prices in part 1d to compute directly the prices of the Foor of part 1c. (2) [20 points] Assume that initially all interest rates are 6% per year and that the term structure of the volatilities (in % per year) of the short rate for term t (in years) is: σ ( t ) = 15-Date : June,16, 2010. 1 2ACTSC445/845 ASSIGNMENT 3. DUE ON MONDAY, JULY, 5TH BEFORE CLASS t 2 . Write a program to compute a 10-year Black-Derman-Toy interest rate lattice with yearly time steps. Using your model to price a callable bond which has the following features (a) face value is 100, (b) coupon rate is 3%, (c) the bond is callable starting from time 5. (at the beginning of 6 year.)...
View Full Document
- Spring '09
- annual coupon rate