Tuckman - Fixed Income Securities

derivababy · September 16th, 2005, 8:14 pm

agree with anybody. too many wanabee quants don't grasp the very basics... so it's dangerous to let them trade untill they get smart street...

cgrajal1 · November 21st, 2009, 8:33 pm

In the text of Tuckman, Fixed Income Securities, someone knows how to get the graphics 9.1-9.4?Thanks a lot...CA

qhedge · November 24th, 2009, 7:59 am

It graphs the probability of reaching the nodes on your rate tree against the rate associated with that node. I guess 9.1 shows a binomial tree with two timesteps and an up probability of 0.5. After two time steps there are three nodes (with rates of 4%, 5% and 6%) with associated probabilities:1) up*up = 0.25 2) up*(1-up) + (1-up)*up = 0.5 (there are two paths to reach the middle node)3) (1-up)*(1-up) = 0.25If you increase the step size the number of nodes increases, however you can use the binomial distribution to infer the probabilities associated with each node.