Simulating Interest rates using CIR and HJM While we can club equity, commodity and currency simulators in one category, interest rate simulators are a completely different animal. First because there is more than one way of modeling interest rates Equilibrium models and Arbitrage free models.
Linking Monte Carlo Simulation with Binomial Trees and the Black Scholes model A binomial tree uses the same process to generate a path that the Monte Carlo simulation model uses which is also the same model that the Black Scholes solution integrates over an infinitely
Monte Carlo Simulations Excel My first interaction with a Monte Carlo simulation was not a very pleasant experience. It was a exam problem based on a difficult text book and an even more incomprehensible study note that I had hardly understood. But over the years
Computational Finance: Monte Carlo (MC) Simulation method: Understanding drift, diffusion and volatility drag
We have introduced our friend mu (u) as drift and sigma as diffusion (or standard deviation or volatility or vol). In the previous session we have also gone out and built a simple excel based Monte Carlo simulation model for generating stock prices. While the
Extending MC simulation models to Currencies & Commodities Extending the original Monte Carlo (MC) Simulator for Equities to Currencies and Commodities required a few simple changes. Rather than using just r, we now use an adjusted r for the model. In the case of currencies
Computational Finance: Building your first Monte Carlo (MC) simulator model for simulated equity prices in Excel
Here is a slightly revised model for calculating the change in price of an equity security. We now add one more component to our generator function. While the first term works off expected return the second term will help us model uncertainty. Since in our world we drive and link uncertainly with volatility, our model also uses a factor proportional to volatility.
Computational Finance: Monte-Carlo (MC) Simulation method– Building Equities, Commodities, Currencies and Interest Rate MC Simulators in Excel
Pricing a financial instrument is not an exact science. There it is out there now; you can go ahead and lynch me for blasphemy. While the formulae, the mathematics, the derivation, the proofs and the exact models would like us to believe otherwise, in essence
Computational Finance – US Treasury Curve Data – Principal Component Analysis (PCA) process, data and volatility function
Principal Component Analysis and Volatility functions (The text and methodology given below follows the content covering the subject topics in “Interest Rate Modelling” by Jessica James and Nick Webber). Principal components analysis (PCA) is a way to analyze the yield curve. It makes use of
Here is the cosmic code joke again. If you can read this, you will understand perfectly what the following section on calibrating the CIR (Cox, Ingersoll and Ross) model means. If you can’t you still have to take that course on computational finance. Now without