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How to utilize results of a Black Derman Toy Model – EXCEL Example
About the course
This course consists of an EXCEL file that demonstrates how the results from the Black Derman Toy (BDT) single factor, short rate no-arbitrage model may be used to price bonds and options. It includes:
- Calculation of up-movements for use in the construction of the short rate binomial tree from volatility results of the BDT model.
- Construction of the short rate binomial tree from the median rate results of the BDT model and up-movements calculated earlier.
- Calculation of the price of a fixed coupon semi-annual bond at issue using the short rate binomial tree to discount the cash flow stream.
- Calculation of the price of a put option first by using the short rate tree and historical interest rate spreads to determine the terminal price of the underlying bond and the resulting payoff of the option and then using the short rate binomial tree to discount the payoffs.
After taking this course you will be above to:
- Build the short rates tree from the outputs of the BDT model (median rates, volatilities and up-movements)
- Calculate the price of a fixed income bonds using the derived short rate tree
- Calculate the price of a put option using the derived short rate
Familiarity with basic mathematics, probability, statistics and EXCEL. Some knowledge of bond and derivative markets including how to derive zero coupon rates and volatilities from yield curve rates and how to set up and obtain output results from the BDT model. (Note: the file does not show how results from the BDT model were derived).
The course is aimed at individuals responsible for the pricing of money market, derivatives and structured products as well as those involved in asset liability management and risk management, including the simulation and stress testing of rate sensitive asset and liability portfolios within banks, insurance companies and mutual funds.