Questions from Business Statistics

Q: Suppose the short rate r is 4% and its real-

Suppose the short rate r is 4% and its real-world process is
,while the risk-neutral process is
(a) What is the market price of interest rate risk? (b) What is the expected return and volatility fo...

Q: If a stock price were mean reverting or followed a path-

If a stock price were mean reverting or followed a path-dependent process, there would be market inefficiency. Why is there not a market inefficiency when the short-term interest rate does so?

Q: Explain the difference between a one-factor and a two-

Explain the difference between a one-factor and a two-factor model.

Q: Suppose that in a risk-neutral world the Vasicek parameters are

Suppose that in a risk-neutral world the Vasicek parameters are a = 0:1, b = 0:03, and =0:01. What is the price of a 5-year zero-coupon bond with a principal of $1 when the short rate is2%?

Q: Suppose that in a risk-neutral world the CIR parameters are

Suppose that in a risk-neutral world the CIR parameters are a =0:1, b =0:03, and=0.07. The market price of interest rate risk is –1 times the square root of the short rate. What are the risk-neutral...

Q: Suppose that the market price of risk of the short rate is

Suppose that the market price of risk of the short rate is 1+2r (with 1 and 1 negative). Show that if the real-world process for the short rate is the one assumed by Vasicek, the risk-neutral proc...

Q: Calculate the alternative duration measure explained in Section 31.2 for

Calculate the alternative duration measure explained in Section 31.2 for a 2-year bond with a principal of $100 paying coupons semiannually at the rate of $3 per year when Vasicek’s model is used with...

Q: What is the difference between an equilibrium model and a no-

What is the difference between an equilibrium model and a no-arbitrage model?