The ICAAP (Internal Capital Adequacy Assessment) Roadmap post reviews the core topics in a crash course format for Internal Capital Adequacy Assessment.
Tag Archives: Interest Rate Models
INTEREST RATE MODELLING
Interest Rate Modelling: Introduction
Interest Rate Forecasting: Using CIR (Cox Ingersoll Ross) Model: Introduction
Interest Rate Forecasting: Using CIR (Cox Ingersoll Ross) Model: Estimating Parameters & Calibrating the CIR Model
Interest Rate Forecasting: Using CIR (Cox Ingersoll Ross) Model: Simulating the term structure of interest rates
Interest Rate Models: Black, Derman and Toy [...]
In this post we will consider how the Black-Derman-Toy (BDT) short rate binomial tree will be used to price options on bonds.
Pricing Options
The BDT model may also be used to price put or call options on bonds. For the purpose of calculating these prices it is important to generate the entire short interest rate tree [...]
In this post we will consider how the Black-Derman-Toy (BDT) short rate binomial tree will be used to price bonds.
Pricing Bonds
For example, we illustrate the use of the short rates to price a hypothetical 3-year fixed income bond at issue as follows:
Using the observed YTM and the excel price formula the price of the security [...]
Earlier we had looked at how the Black-Derman-Toy (BDT) interest rate model may be constructed in EXCEL. In particular we saw how the median rates and time varying volatilities (sigmas) of the short rate binomial tree were derived. In this post we will see how these values will be used to construct the complete short [...]
Earlier we had considered how to define the various elements (input, output and calculation cells) of the Black-Derman-Toy (BDT) interest rate model in EXCEL. In this post we will link all these pieces together by using the Solver Function of the EXCEL worksheet. Once this has been done we will run the Solver Function to [...]
In this post we continue with the definition of the calculation cells of the Black-Derman-Toy (BDT) model in EXCEL by seeing how yields are determined from the prices calculated from the state price lattices. We use these determined yields to derive the yield volatility of the lattice.
Define Calculation Cells
d. Calculate Yields
As mentioned earlier the model [...]
Continuing with the definition of the calculation cells of the Black-Derman-Toy (BDT) model in EXCEL, we will see how prices are determined from the initial yield rates and from the three state price lattices in the post below.
Define Calculation Cells
c. Calculate Prices from Lattice
Based on the lattices we now derive the prices as follows:
c.1. Initial [...]
In this post we continue with the definition of the calculation cells of the Black-Derman-Toy (BDT) model in EXCEL. Three state prices lattices are constructed.
Define Calculation Cells
b. Construct State Price Lattices
The BDT model assumes that the short-term interest rates are log-normally distributed with risk-neutral probabilities of an interest rate going up or down in any [...]
Earlier we had defined the input and output cells for the Black-Derman-Toy (BDT) interest rate model. In this post we will consider how the first set of calculation cells, i.e. the short rate binomial tree will be defined in EXCEL.
Define Calculation Cells
a. Construct short rate binomial tree
It is important to note here that in constructing [...]
