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Financial Risk Manager Part 2

Financial Risk Manager Part 2

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A risk analyst constructs a binomial interest rate tree by using the Ho-Lee model. The time step is monthly and the annualized drift is 80 bps in the first month and 120 bps in the second month. Assuming the current annualized short-term rate is 3.2% and the annual basis point-volatility is 2.1%, what is the interest rate at the lowest node after 2 months?

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