Term Structure - Discrete Single Factor Models
Overview
Binomial Tree
The current spot rate is given as 3.5 percent, and the rate volatility is measured to be 10%.
The top root node of the tree will then have a {% r_0 = 3.5\% %}
Moving down one layer, there will be two nodes, {% r_{1,L}, r_{1,H} %}
which have the following relationship:
{% r_{1,H} = r_{1,L}(e^{2 \sigma}) %}
Try it!
