Financial Risk Manager Part 2
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A financial analyst at a securities firm is analyzing a yield curve model focused on short-term interest rates, which is critical for valuing debt instruments. This model accounts for the long-term variability of the short rate and incorporates a time-varying drift component. To effectively understand the behavior of these short-term rates, the analyst has constructed a one-year interest rate tree, with evaluations occurring every three months. The parameters utilized in this model are as follows:
Given that interest rates exhibit an upward trend during the first three quarters and a downward trend in the last quarter, what will the interest rate be at the end of the one-year period?