Pricing Interest-Rate-Derivative Securities

Hull, John C.; White, Alan

doi:10.1093/rfs/3.4.573

Cited by 1,796 publications

(881 citation statements)

References 19 publications

(24 reference statements)

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“…However, the short rate movement is assumed to be constant, which results in a failure to derive an interest rate that is always consistent with the market interest rate. Therefore, Hull and White (1990) incorporate the discount function into the Vasicek model and relax the constant short rate assumptions of Ho and Lee (1986) to derive the one-factor equilibrium term structure model, which is capable of determining a short rate process that is consistent with the current term structure of interest rates. Furthermore, Ho and Lee (1986), and Hull and White (1990) apply term structure equilibrium models to the pricing of discount bonds.…”

Section: Introductionmentioning

confidence: 99%

“…Therefore, Hull and White (1990) incorporate the discount function into the Vasicek model and relax the constant short rate assumptions of Ho and Lee (1986) to derive the one-factor equilibrium term structure model, which is capable of determining a short rate process that is consistent with the current term structure of interest rates. Furthermore, Ho and Lee (1986), and Hull and White (1990) apply term structure equilibrium models to the pricing of discount bonds. In these models, all discount bonds are priced relative to the stochastic short rate such that there are no arbitrage opportunities in their trading.…”

Section: Introductionmentioning

confidence: 99%

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Pricing Range Accrual Interest Rate Swap employing LIBOR market models with jump risks

Lin

Wang

Chen

et al. 2017

The North American Journal of Economics and Finance

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As an important economic index, interest rates are assumed to be constant in the Black and Scholes model (1973); however, they actually fluctuate due to economic factors. Using a constant interest rate to evaluate derivatives in a stochastic model will produce biased results.This research derives the LIBOR market model with jump risks, assuming that interest rates follow a continuous time path and tend to jump in response to sudden economic shocks. We then use the LIBOR model with jump risk to price a Range Accrual Interest Rate Swap (RAIRS). Given that the multiple jump processes are independent, we employ numerical analysis to further demonstrate the influence of jump size, jump volatility, and jump frequency on the pricing of RAIRS. Our results show a negative relation between jump size, jump frequency, and the swap rate of RAIRS, but a positive relation between jump volatility and the swap rate of RAIRS. When new information emerges, the resulting increase in jump size reduces the value of LIBOR, which in turn lowers the value of RAIRS. Similarly, the value of RAIRS declines when the jump frequency of LIBOR increases. This is because jump frequency is associated with higher uncertainty risk, and the market pays out a premium for bearing such risk. On the other hand, when jump volatility increases, both parties must agree to a higher swap rate because the floating rate payer is subsidized by the fixed rate payer for bearing risk.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Pricing Range Accrual Interest Rate Swap employing LIBOR market models with jump risks

Lin

Wang

Chen

et al. 2017

The North American Journal of Economics and Finance

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show abstract

“…This solution also satisfies the original PDE with the appropriate boundary conditions. This method has been also applied in the interest models literature such as Hull and White (1990), Brown and Schaefer (1994) and Kan (1993, 1996).…”

Section: Resultsmentioning

confidence: 99%

“…Very recently and through independent work, Nielsen and Schwartz (2004) present a 2 A similar solution method has been applied in the interest rate models literature such as Hull and White (1990), Brown and Schaefer (1994) and Kan (1993, 1996). two-factor model which also assumes stochastic volatility of the Cox-Ingersoll-Ross type.…”

Section: Introductionmentioning

confidence: 99%

A Two-Factor Model for Commodity Prices and Futures Valuation

Ribeiro¹,

Hodges

2004

SSRN Journal

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This paper develops a reduced form two-factor model for commodity spot prices and futures valuation. This model extends the Gibson and Schwartz (1990)-Schwartz (1997) two-factor model by adding two new features. First the Ornstein-Uhlenbeck process for the convenience yield is replaced by a Cox-Ingersoll-Ross (CIR) process. This ensures that our model is arbitrage-free. Second, spot price volatility is proportional to the square root of the convenience yield level. We empirically test both models using weekly

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“…We consider the Hull-White stochastic interest rate [22] which is driven by the following mean-reverting process:…”

Section: The Pricing Modelmentioning

confidence: 99%

Efficient Simulation for Pricing Barrier Options with Two-Factor Stochastic Volatility and Stochastic Interest Rate

Jieqiong

2017

Mathematical Problems in Engineering

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This paper presents an extension of the double Heston stochastic volatility model by combining Hull-White stochastic interest rates. By the change of numeraire and quadratic exponential scheme, this paper develops a new simulation scheme for the extended model. By combining control variates and antithetic variates, this paper provides an efficient Monte Carlo simulation algorithm for pricing barrier options. Based on the differential evolution algorithm the extended model is calibrated to S&P 500 index options to obtain the model parameter values. Numerical results show that the proposed simulation scheme outperforms the Euler scheme, the proposed simulation algorithm is efficient for pricing barrier options, and the extended model is flexible to fit the implied volatility surface.

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Pricing Interest-Rate-Derivative Securities

Cited by 1,796 publications

References 19 publications

Pricing Range Accrual Interest Rate Swap employing LIBOR market models with jump risks

Pricing Range Accrual Interest Rate Swap employing LIBOR market models with jump risks

A Two-Factor Model for Commodity Prices and Futures Valuation

Efficient Simulation for Pricing Barrier Options with Two-Factor Stochastic Volatility and Stochastic Interest Rate

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