Volatility in lattice

calculator · July 13th, 2004, 9:46 am

We have a lattice model for HJM 1 factor. We want to check the volatility in the tree. We try :E (r^2) - E(r)^2 with expectation including discount factor.We compare that result to DF^2 * F^2 * vol^2 * tbut both results are different. Why ?RegardsC

Kvadrik · July 14th, 2004, 1:28 pm

Excuse me, I didn't use the lattice model for HJM 1 factor. But I see that E (r^2) - E(r)^2 is the theoretical formula for variation. DF^2 * F^2 * vol^2 * t is the evaluation, but of what? The last one has another dimension than the first formula.