ActSc 445/845 Fall 2009
Assignment 3
Due Date: November 12, 2009 (in class)
Note:
445 students can work in teams of two for this assignment. No team of three is allowed.
A dropbox on UWACE will be created where you will be asked to provide your computer Fles
(Excel spreadsheet, R/Matlab programs, etc.) for the assignment. ±urther instructions on what to
hand in and how to let us know who the team members are will be posted later on.
1.
b
b
b
b
b
b
b
b
b
6%
5%
7%
4%
6%
8%
3%
5%
7%
9%
year 0
year 1
year 2
year 3
Short Rate Binomial Lattice
q
(
t, n
) = 0
.
5
Answer the following parts based on the above (riskless) short rate lattice:
(a) Compute the implied 1year, 2year and 3year spot rates of interest.
(b) Use backward recursion to price a 4year coupon bond with 100 face value and annual
coupon rate of 6% payable annually.
(c) Use backward recursion to price a 2year ²oor with ²oor rate 6% payable in advance,
$1,000 notional amount and reset annually.
(d) Compute the ArrowDebreu prices
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 Spring '09
 ChristianeLemieux
 Interest Rates, Short rate model, short rate

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