The Science of Term Structure - Part II
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About the Lecture
The lecture The Science of Term Structure - Part II by Edu Pristine is from the course Archiv - Market Risks. It contains the following chapters:
- Option Pricing - Solution
- Use of non-Recombining Trees
- Constant Maturity Treasury Swap
- Reducing Time Steps in Pricing Derivatives
- Fixed Income Securities
- Price/Yield Function of Bond
- Questions
Author of lecture The Science of Term Structure - Part II
Edu Pristine
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Excerpts from the accompanying material
... Option value = 0, Int. Rate = 4.61%, Bond Price = 101.59, Option value = 0.39, End of Y1 Int. Rate = 9.72%, Bond Price = 96.61, Option value = 0, Int. Rate = 7.35%, ...
... in the middle node of year 2 is same regardless of the path. I.e.: The interest rates are path-independent. In reality it may occur that the interest rates move at a different pace when ...
... A CMT swap is an agreement to swap a floating rate for ...
... there is a 72% risk-neutral probability of an up-move in six months and a 64% risk-neutral probability in 1 year. ...
... of the 1-year payoffs + the 6-month payoffs. The today price is calculated as ...
... Int. Rate = 7.31%, Swap Price = - $3,779.94, 6 months Int. Rate = 9.12%, Swap Price = $5,600, Int. Rate = 8.00%, ...
... time steps used in previous examples can be made much smaller. As the steps become smaller the ...
... when the interest rate equals zero. The model assumes that the risk-free rate is constant. Changes in the short-term rates do occur and these changes cause rates along the yield curve and bond ...
... in bond price will slow down and will eventually level off. This is known as negative convexity. The point where the curve starts flattening is known as y'. Above this yield the bond will exhibit positive convexity. The callability caps an investor's capital gains as the yield ...
... Price/Yield Function of Bond with a ...
... constant. 2. Consider a CMT swap which has the following payoff (1,000,000/2) * (y CMT - 8%). If there is a 65% probability that the 6-month spot rate increases in 6-months and a 75% probability that it increases ...
... credit risk, and this is not one of the assumptions that does not apply to fixed income securities. ...
... Similar other payoffs can be calculated. Payoff at upper 6-month node = Price at V0 ...
