from a given risk neutral tree can you compute the mar- ket participants' expectation on the level of interest rates in the future? Explain.

Question

Quizplus · Accepted Answer

You cannot use a tree to compute market expectations since the tree is computed in the risk neutral world, where probabilities are not the the true probabilities. In order to predict the true value we need to use the true probabilities.

From a Given Risk Neutral Tree Can You Compute the Mar-