What is the market price of interest rate risk

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Reference no: EM132046824

Suppose that the short rate is 4% and its real-world process is:

dr = 0.1(0.05 - r)dt + 0.01dz

While the risk-neutral process is:

dr = 0.1(0.11 - r)dt + 0.01dz

First Question:

What is the market price of interest rate risk?

Second Question: What is the expected return and volatility for a 5-year

zero coupon bond in the risk-neutral world?

Third Question: What is the expected return and volatility for a 5-year zerocoupon bond in the real world?

Reference no: EM132046824

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