Can someone help explain Q37 in the CFA Level II 2017 Mock Exam PM?
Why is Fujioka incorrect about the calibration of the interest rate trees? To calibrate the binomial tree, you would have to make sure 2^n interest rate nodes are adjusted. Given that sheer amount of size, wouldn’t a complicated software be needed? The answer suggests that one could just use EXCEL Solver.
I’ve never personally performed a “calibration” of interest rate trees. Has anyone done it before? If so, can someone shed light on this?
at first try, I also answered this. I just learned to accept that maybe binomial tree construction is as simple as CFAI asserts. let’s not argue with CFAI.
edit: what CFAI seems to suggests is that, using the current market bond prices, one can use excel solver to determine the appropriate interest rates in the tree.