Lecture_00 - 0 PROLOGUE A The Approach This book studies a...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
1 0 P ROLOGUE A The Approach This book studies a new approach for understanding and analyzing fixed-income securities and interest rate options. It focuses on risk management, i.e., the arbitrage free pricing and hedging of fixed-income securities. This is in contrast to the traditional focus of textbooks in this area. Traditional textbooks
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 This book provides a self-contained study of this new approach for pricing and hedging fixed-income securities and interest rate options. This new approach is called the Heath, Jarrow, and Morton (“HJM”) model. This approach is illustrated with the standard binomial model. The standard binomial model is chosen because of its mathematical simplicity. This is with little loss of generality, as the alternative and more complex stochastic calculus techniques need to be numerically implemented on a computer using the binomial model. With minor modifications, this technology can be easily extended (built upon) to handle the pricing of other more complex instruments, for example, foreign currency derivatives, commodity derivatives, and credit derivatives. B Motivation
Background image of page 2
3 Figure 1: Treasury Bond Yields on March 31, 1997 0.04 0.045 0.05 0.055 0.06 0.065 0.07 0.075 0 5 10 15 20 25 30 Time (Years)
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 A bond is an IOU issued for borrowing a stated amount of dollars (e.g. $10,000), called the principal, for a period of time (e.g. 5 years), called the bond’s maturity. Interest is paid regularly (often semi-annually) on this IOU. A Treasury bond’s
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 15

Lecture_00 - 0 PROLOGUE A The Approach This book studies a...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online