Calculate the process for the forward bond price

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The price of a bond at time T, measured in terms of its yield, is G(y_T). Assume geometric Brownian motion for the forward bond yield y in a world that is forward risk neutral with respect to a bond maturing at time T. Suppose that the growth rate of the forward bond yield is α and its volatility α_y.

(a) Use lemma to calculate the process for the forward bond price in terms of α, α_y, y, and G(y).

(b) The forward bond price should follow a martingale in the world considered. Use this fact to calculate an expression for α.

Reference no: EM131241062

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