Question

Suppose that the price of a zero-coupon bond maturing at time $T$ follows the process $$ d P(t, T)=\mu_P P(t, T) d t+\sigma_P P(t, T) d z $$ and the price of a derivative dependent on the bond follows the process $$ d f=\mu_f f d t+\sigma_f f d z $$ Assume only one source of uncertainty and that $f$ provides no income. (a) What is the forward price $F$ of $f$ for a contract maturing at time $T$ ? (b) What is the process followed by $F$ in a world defined by the numeraire $P(t, T)$ ? (c) What is the process followed by $F$ in the traditional risk-neutral world? (d) What is the process followed by $f$ in a world defined by a numeraire equal to a bond maturing at time $T^*$, where $T^* \neq T$ ? Assume that $\sigma_P^*$ is the volatility of this bond.

   Suppose that the price of a zero-coupon bond maturing at time $T$ follows the process
$$
d P(t, T)=\mu_P P(t, T) d t+\sigma_P P(t, T) d z
$$
and the price of a derivative dependent on the bond follows the process
$$
d f=\mu_f f d t+\sigma_f f d z
$$
Assume only one source of uncertainty and that $f$ provides no income.
(a) What is the forward price $F$ of $f$ for a contract maturing at time $T$ ?
(b) What is the process followed by $F$ in a world defined by the numeraire $P(t, T)$ ?
(c) What is the process followed by $F$ in the traditional risk-neutral world?
(d) What is the process followed by $f$ in a world defined by a numeraire equal to a bond maturing at time $T^*$, where $T^* \neq T$ ? Assume that $\sigma_P^*$ is the volatility of this bond.
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Options, Futures, and Other Derivatives
Options, Futures, and Other Derivatives
John C. Hull 10th Edition
Chapter 28, Problem 16 ↓

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In this case, the risk-free rate is given by the instantaneous forward rate $r(t)$, which is the continuously compounded rate of return on the zero-coupon bond.  Show more…

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Suppose that the price of a zero-coupon bond maturing at time $T$ follows the process $$ d P(t, T)=\mu_P P(t, T) d t+\sigma_P P(t, T) d z $$ and the price of a derivative dependent on the bond follows the process $$ d f=\mu_f f d t+\sigma_f f d z $$ Assume only one source of uncertainty and that $f$ provides no income. (a) What is the forward price $F$ of $f$ for a contract maturing at time $T$ ? (b) What is the process followed by $F$ in a world defined by the numeraire $P(t, T)$ ? (c) What is the process followed by $F$ in the traditional risk-neutral world? (d) What is the process followed by $f$ in a world defined by a numeraire equal to a bond maturing at time $T^*$, where $T^* \neq T$ ? Assume that $\sigma_P^*$ is the volatility of this bond.
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