Page 41 - PowerPoint Presentation
P. 41
LOS 35.h: Describe a Monte Carlo forward-rate READING 35: THE ARBITRAGE-FREE VALUATION FRAMEWORK
simulation and its application.
EXAMPLE: You now want to value the same MODULE 35.2: BINOMIAL TREES, PART 2
three-year, 3% annual-pay Treasury bond as
discussed before, using the Monte Carlo
simulation method and you have generated
the following data:
Once again same prior results = $94.485!
Interest rates calibrated to ensure that the valuation obtained was
consistent with market prices (i.e., arbitrage-free)!