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Q) The current 6-month short rate sits at 3% per year. The mean growth rate...

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Finance

Q) The current 6-month short rate sits at 3% per year. The mean growth rate of the short rate is 3%; the volatility of short rate growth is 25%. (short rate is insurance premium rate, t=0.5=6 month, t=1=1year)

a) What would be the 6-month short rate in the up state at time t=0.5 (units: % per year)? t=0.5 is 6 month. b) What would be the 6-month short rate in the down state at time t=0.5 (units: % per year)?

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