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Implementation of Short-Rate Models - A Case Study of the Black-Derman-Toy Model of Interest Rate

PRM Awoga CPA (Oluwaseyi (Tony).)

出版	SSRN, 2017
URL	http://books.google.com.hk/books?id=ZUP9zgEACAAJ&hl=&source=gbs_api

註釋

In order to value a bond with one or more embedded options, one must consider the volatility of interest rates, as changes in volatility will affect the possibility of the option being exercised. The valuation of bonds with embedded options can be achieved by constructing a binomial or trinomial interest rate tree that models the random evolution of future interest rates and then by using backward-induction to generate the value of the bond at each node. No-arbitrage models such as the Black-Derman-Toy (BDT) model are more commonly used in practice to price financial instruments with embedded options or contingent claims. In this paper therefore, we explore how one of the no-arbitrage short rate models, the BDT model, can be implemented in a practical and reproducible manner. This is the first in our series of discussions on short-rate models. In future essays, we will discuss the implementation of other short-rate models namely the Hull-White, Ho-Lee, Kalotay-Fabozzi-Williams and the Black-Karansinski models of interest rates.