Download Efficient Methods for Valuing Interest Rate Derivatives by Antoon Pelsser PDF

By Antoon Pelsser

Efficient equipment for Valuing rate of interest Derivatives offers an summary of the types that may be used for valuing and coping with rate of interest derivatives. cut up into elements, the 1st discusses and compares the normal types, reminiscent of spot- and forward-rate types, whereas the second one concentrates at the extra lately built industry types. not like such a lot of his opponents, the author's concentration isn't just at the arithmetic: Antoon Pelsser attracts on his adventure in to discover the sensible concerns, corresponding to the implementation of types, and version selection.
Aimed at individuals with an outstanding quantitative history, this booklet might be of specific curiosity to probability managers, rate of interest spinoff investors, quantitative researchers, portfolio and fund managers, and scholars of arithmetic and economics, however it also will turn out valuable to an individual searching for an exceptional evaluate of rate of interest spinoff modelling.

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Spot and Forward Rate Models The first part of this book is devoted to spot and forward rate models. These types of models take instantaneous interest rates as the basis for modelling the term-structure of interest rates. A spot instantaneous interest rate is the interest one earns on a riskless investment over an infinitesimal time-period dt. Once we have a model for the evolution of the spot instantaneous interest rates, all other interest rates can be derived by integrating over the spot interest rates.

This will be explained in the next section. 5 Assuming, of course, the next floating rate has not been set yet; if it has been set, the next floating rate payment is known, and can be viewed as a discount bond. 52 5. 3 Implementatio n of the Model In this section we show how the Hull-White model we are considering can be fitted to the initial term-structure of interest rates by choosing a( t), and hence O*(t), such that the initial discount bond prices D(O, T) are priced correctly. To calculate prices for derivatives for which no analytic formulre are available, we develop an explicit finite difference method for the HullWhite model.

2 we explain how interest rate derivatives can be priced via expectations under the equivalent martingale measure, using the methodology of Heath, Jarrow and Morton (1992). In the final section we discuss similarities between the two methodologies. 1 Vasicek Methodology In this section we show how interest rate derivatives can be valued using partial differential equations. The derivation of the partial differential equation is based on Vasicek ( 1977). 1 Spot Interest Rate We will restrict our attention to one-factor models, which describe the evolution of the spot interest rate with one source of uncertainty.

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