In a binomial interest rate tree model, assume that the six-month rate process starts on date 0 ((=0) at 5% and thenincreases or decreases by 100 basis points every six months. On date 0. the prices of a six-month zero (A) and a 1-yearzero (B) are 97.5610 and 95.0908 respectively.a) Find the risk-neutral probability of an up move on date 0 for the six-month rate process over the next 6-month.b) Find the price of the 1-year zero (B) in the down state of the binomial tree on date 1 (t-1).

Introduction Initially the price of 6 month is 0 and after 6 month it will either increases or…

In a binomial interest rate tree model, assume that the six-month rate process starts on date 0 (=0) at 5% and then increases or decreases by 100 basis points every six months. On date 0, the prices of a six-month zero (A) and a l-year zero (B) are 97.5610 and 95.0908 respectively. a) Find the risk-neutral probability of an up move on date 0 for the six-month rate process over the next 6-month. b) Find the price of the 1-year zero (B) in the down state of the binomial tree on date 1 (t-1).

In a binomial interest rate tree model, assume that the six-month rate process starts on date 0 (=0) at 5% and then increases or decreases by 100 basis points every six months. On date 0, the prices of a six-month zero (A) and a l-year zero (B) are 97.5610 and 95.0908 respectively. a) Find the risk-neutral probability of an up move on date 0 for the six-month rate process over the next 6-month. b) Find the price of the 1-year zero (B) in the down state of the binomial tree on date 1 (t-1).

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.6P

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