Hello,
I can’t get the interest rates calculated from the volatility of 20% and the forwrad rates given in exhibit 2.
For example for year2 -uprate : 1.7677%* e(2*20%)
Can anyone enlighten me pls ?
Thank you
Can you get a better a reference to what you are reffering to.
The forward rates in the bionomal tree are calcualted from calibration with market prices.
The forward price is a good first estimate but you need to use an iterative process.
but remember the fwd rate would give you the middle value.
So lower first estimate would be 1.7677/e^20% and upper is linked to that.
The process is explained in section 4 learning module 2 fixed income.