Hi there. I want to ask what formulas should I memorize for this chapter as they are quite a lot of tedious expression in it. Thanks in advance.
Pray hard that, if they test this part of CM2, it comes out in paper B and the first part, perhaps, is to simply build in the formula. But if you mean for paper A. It's probably better to understand the relationship between the various notations, the desirable characteristics of interest rate models as well as the actual characteristics of Vasicek etc. Don't forget, pages 50 and 52 of the Yellow Book give some of these formulae.
Hi Jia The summary page for the chapter is a good start. In addition, I would make 100% sure that you can solve the Vasicek SDE. I would learn the generic formula for pricing a bond where the interest rate model is stochastic: B(t,T) = EQ[exp{-∫r(u)du}|Ft] where the integral runs from t to T. I would also learn the result of this for the Vasicek model, ie the formula at the bottom of Page 17 of the chapter notes (or equivalently those at the top of Page 18 of the chapter notes). Make sure you know the features of the three models (V, CIR, H&W) in words and the limitations of one-factor models. It's always possible something else comes up but these are the main things that have appeared in the past. Anna
