Exercise 1. Consider the two period deterministic model having three instruments D01, D02, and D012; a zero coupon bond maturing at t1, a zero coupon bond maturing at t2, and a forward starting zero...

Exercise 1. Consider the two period deterministic model having three instruments D01, D02, and D012; a zero coupon bond maturing at t1, a zero coupon bond maturing at t2, and a forward starting zero coupon bond from t1to t2. The non zero cash flows for the bonds are C1 (D01)=1, C2 (D02)=1, C1 (D012)=-D012, and C2 (D012)=1. Given prices X0 (D01)=D01, X0 (D02)=D02, and X0 (D012)=0, find the the value of D012in terms of D01and D02that ensures the model is arbitrage free. (Hint: Find the unique price deflators ?0=1, ?1and ?2.) Exercise 2.


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Exercise 1. Consider the two period deterministic model having three instruments D01, D02, and D012; a zero coupon bond maturing at t1, a zero coupon bond maturing at t2, and a forward starting zero coupon bond from t1to t2. The non zero cash flows for the bonds are C1 (D01)=1, C2 (D02)=1, C1 (D012)=-D012, and C2 (D012)=1. Given prices X0 (D01)=D01, X0 (D02)=D02, and X0 (D012)=0, find the the value of D012in terms of D01and D02that ensures the model is arbitrage free. (Hint: Find the unique price deflators ?0=1, ?1and ?2.) Exercise 2. Consider the n period model having instruments Rj, 0=j






Exercise 1. Consider the two period deterministic model having three instruments D01, D02, and D012; a zero coupon bond maturing at t1, a zero coupon bond maturing at t2, and a forward starting zero coupon bond from t1to t2. The non zero cash flows for the bonds are C1 (D01)=1, C2 (D02)=1, C1 (D012)=−D012, and C2 (D012)=1. Given prices X0 (D01)=D01, X0 (D02)=D02, and X0 (D012)=0, find the the value of D012in terms of D01and D02that ensures the model is arbitrage free. (Hint: Find the unique price deflators Π0=1, Π1and Π2.) Exercise 2. Consider the n period model having instruments Rj, 0≤j
May 26, 2022
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