Assume an initial interest rate of 5%. Using a binomial model to approximate normally distributed...
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Assume an initial interest rate of 5%. Using a binomial model to approximate normally distributed rates with weekly time steps, no drift, and an annualized volatility of 100 basis points, what are the two possible rates on date 1?
Consider the following segment of a binomial tree with 6-month time steps. All transition probabilities equal .5.
5.360%
4.697%
3.99% 4.648%
3.964%
4.031%
Does this tree display mean reversion?
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