Suppose that short rate r is 4% and its real-world process is dr 0:10:05 r dt 0:01 dz
Chapter 31, Problem 31.22(choose chapter or problem)
Suppose that short rate r is 4% and its real-world process is dr 0:10:05 r dt 0:01 dz, while the risk-neutral process is dr 0:10:11 r dt 0:01 dz. (a) What is the market price of interest rate risk? (b) What is the expected return and volatility for a 5-year zero-coupon bond in the riskneutral world? (c) What is the expected return and volatility for the 5-year zero-coupon bond in the real world? I
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