Can someone post the steps involved in taking a binomial interest rate tree’s rate (say at the bottom) and finding the rate 2 nodes above it (or below)? Struggling to find an example right now…
Let’s say the interest rate is 1%. And the node we’re looking for is 1 above and 2 above at t=2.
1% x e^(2)
1% x e^(4)
How do I enter this into the calculator?
You will need the interest rate volatility as well. Let’s assume it is 15% per annum (and your interest rate tree has an annual interval).
If the interest rate in the bottom node is 1%, then the node directly above it will be:
1% x exp(2 x 0.15)
And the 2nd node above the node in the bottom will be:
1% x exp(4 x 0.15)
If you are using your Texas BA II, then it will be:
2 x 0.15 = [2ND] [LN] x 1
4 x 0.15 = [2ND] [LN] x 1
Ah - I see now. Basically have to key it in backwards. That’s where I was getting tripped up.
Thank you fino!