Binary Model

Summaries

1. Assume a particular level of volatility
2. Interest rate has equal chance to take the 2 possible values in the next period
3. This forms a binary tree and this set of path is called the interest rate tree.
4. Also i_{2, LU} = i_{2, UL}
5. Each rate on the tree is the 1-period forward rate
6. i_1,U=i_1,L(e^2sigma)    (e.g. of model)