Sunday, July 3, 2016

Pricing interest rate swap in Ho Lee model


In Ho Lee model, assuming risk neutral probability is not exactly 0.5, would a change in the volatility of short-term rate affect the price of an interest rate swap? My intuition tells me no as interest rate swap price should only depend on prices of zero at t=0 but my model is throwing a different answer.


Would you it be possible to have some help on both mathematical and intuitive explanations, please?


Many thanks.





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