Financial Risk Manager Part 2

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Explanation:

In the Vasicek model, the standard deviation of the terminal distribution of the short rate after T years is given by:

\sqrt{\left(\frac{\sigma^2}{2k}\right)(1 - e^{-2kT})}

= \sqrt{\left(\frac{1.26^2}{2 \times 0.025}\right)(1 - e^{-2 \times 0.025 \times 10})}

= \sqrt{\left(\frac{1.26^2}{2 \times 0.025}\right)(1 - e^{-0.5})}

= 3.53\% \text{ or } 353 \text{ basis points}

Explanation:

In the Vasicek model, the standard deviation of the terminal distribution of the short rate after T years is given by:

\sqrt{\left(\frac{\sigma^2}{2k}\right)(1 - e^{-2kT})}

= \sqrt{\left(\frac{1.26^2}{2 \times 0.025}\right)(1 - e^{-2 \times 0.025 \times 10})}

= \sqrt{\left(\frac{1.26^2}{2 \times 0.025}\right)(1 - e^{-0.5})}

= 3.53\% \text{ or } 353 \text{ basis points}

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Last updated: July 5, 2026 at 07:18

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