Science of Term Structure Models
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About the Lecture
The lecture Science of Term Structure Models by Edu Pristine is from the course Archiv - Market Risks. It contains the following chapters:
- Interest Rate Tree - Binomial Model
- Backward Induction
- Risk-neutral Probalilities & Interest-Rate Drift
- Risk-neutral Pricing
- Option Pricing
Author of lecture Science of Term Structure Models
Edu Pristine
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Excerpts from the accompanying material
... assumes that interest rates can take only a max. of two possible values in the next period. The model assumes ...
... the bond at the upper node for period 1, V1, L. The value of the bond today V0. Since the computed value of the bond equals the market price, the binomial tree is arbitrage free ...
... the market prices we use something known as risk-neutral probabilities. The 0.5 probability used in the previous example is known as true probability. ...
... Adjust the interest rates. Use the spot and forward rates derived from the current yield curve and adjust the interest rates on the paths of the trees. Value derived from the model should be equal to the market price of the on-the-run bond. The interest rates can then be used to price ...
