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Math Help - Vasicek model

  1. #1
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    Vasicek model

    Hi can you please help me with this problem,

    For the Vasicek interest rate model with short rate process drt = K(θ-rt)dt + σ dWt, show that the bond price B(t,T,r) can be found as B(t,T,r)=exp[A(t,T)r​t+Z(t,T)] for deterministic functions A(t,T) and Z(t,T). Find A(t,T) and Z(t,T).
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  2. #2
    MHF Contributor
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    Re: Vasicek model

    Hey nirmal019.

    You need to use the generalized form of Ito's lemma to get the integral portion for the non-random and random components. Do you know these identities? (I'm sure you have been given these by your lecturer/professor).
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