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What does this spot rate dynamics imply

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Reference no: EM131105322

Suppose you are given the following SDE for the instantaneous spot rate:
drt = σr1dWt,
where the Wt is a Wiener process under the real-world probability and the σ is a constant volatility. The initial spot rate r0 is known to be 5%.

(a) What does this spot rate dynamics imply?

(b) Obtain a PDE for a default-free discount bond price B(t, T) under these conditions.

(c) Can you determine the solution to this PDE?

(d) What is the market price of interest rate risk? Can you interpret its sign?

Reference no: EM131105322

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