In Section 31.2 of Hull, it says that "The shape of the term structure at time t is independent of r(t), but does depend on t." What does this mean? Could anyone help explain, please?
“Shape” is the key word here, as clearly the term structure does depend on r. The long rate R for both models is a linear function of r. It’s of the form R=A+B*r The key point being A and B don’t depend on r. Hence the overall size of the yields or “level” of the term structure is determined by r, but the general shape of the curve isn’t.
