Process followed by f in the traditional risk neutral world

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Reference no: EM131240981

Suppose that the price of a zero-coupon bond maturing at time T follows the process

and the price of a derivative dependent on the bond follows the process

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 that is forward risk neutral with respect to P(t , T)?

(d) What is the process followed by f in a world that is forward risk neutral with respect to a bond maturing at time T* , where T* ≠ T? Assume that is the volatility of this bond.

Reference no: EM131240981

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