11-termstruc(f)

11-termstruc(f) - Primbs, MS&E 345 1 Interest Rate...

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Unformatted text preview: Primbs, MS&E 345 1 Interest Rate Derivatives Primbs, MS&E 345 2 Parameterizing the linear pricing functional Single factor models, etc. Heath-Jarrow-Morton Primbs, MS&E 345 3 Derivative pricing is nothing more than fitting data points with a linear function. Payoff Price x x Bonds Bonds are our data points Price=L(Payoff) The Big Picture - = Payoff ds r E T s Q ) exp( x x x Primbs, MS&E 345 4 In order to price bond options, caps, floors, swaptions, etc. we didnt need to specify underlying processes explicitly. We just assumed log-normality of certain variables. To price more complicated interest rate derivatives, we need to specify processes explicitly. For interest rate derivatives, this means specifying the short rate process in the risk neutral world. - = payoff ) exp( price T s Q ds r E where dz t r b dt t r a dr ) , ( ) , ( + = under Q Primbs, MS&E 345 5 Parameterizing the linear pricing functional Single factor models, etc....
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This note was uploaded on 06/17/2010 for the course MS&E 345 taught by Professor Jimprimbs during the Winter '10 term at Stanford.

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11-termstruc(f) - Primbs, MS&E 345 1 Interest Rate...

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