Question
Suppose that in a risk-neutral world the CIR parameters are $a=0.15, b=0.025$, and $\sigma=0.075$. What is the price of a 5 -year zero-coupon bond with a principal of $$\$ 1$$ when the short rate is $2.5 \%$ ?
Step 1
The mean reversion level, $\theta$, is calculated as $\theta = \frac{b}{a}$. In this case, $b=0.025$ and $a=0.15$, so $\theta = \frac{0.025}{0.15} = 0.1667$. Show more…
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