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1、Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.1,Interest Rate Derivatives: More Advanced ModelsChapter 24,Options, Futures, and Other Derivatives, 5th edition © 2002 by Joh
2、n C. Hull,24.2,The Two-Factor Hull-White Model (Equation 24.1, page 571),Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.3,Analytic Results,Bond prices and European options on zero-co
3、upon bonds can be calculated analytically when f(r) = r,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.4,Options on Coupon-Bearing Bonds,We cannot use the same procedure for options
4、 on coupon-bearing bonds as we do in the case of one-factor modelsIf we make the approximate assumption that the coupon-bearing bond price is lognormal, we can use Black’s modelThe appropriate volatility is calculated
5、from the volatilities of and correlations between the underlying zero-coupon bond prices,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.5,Volatility Structures,In the one-factor Ho-L
6、ee or Hull-White model the forward rate S.D.s are either constant or decline exponentially. All forward rates are instantaneously perfectly correlatedIn the two-factor model many different forward rate S.D. patterns and
7、 correlation structures can be obtained,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.6,Example Giving Humped Volatility Structure (Figure 24.1, page 572)a=1, b=0.1, s1=0.01, s2=0.
8、0165, r=0.6,,,,,,,,,,,,,,,,,,,,,,,,0.00,0.20,0.40,0.60,0.80,1.00,1.20,1.40,,,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.7,Transformation of the General Model,Options, Futures, an
9、d Other Derivatives, 5th edition © 2002 by John C. Hull,24.8,Transformation of the General Model continued,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.9,Attractive Features
10、of the Model,It is Markov so that a recombining 3-dimensional tree can be constructedThe volatility structure is stationaryVolatility and correlation patterns similar to those in the real world can be incorporated into
11、 the model,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.10,HJM Model: Notation,P(t,T ): price at time t of a discount bond with principal of $1 maturing at TWt : vector of past
12、 and present values of interest rates and bond prices at time t that are relevant for determining bond price volatilities at that timev(t,T,Wt ): volatility of P(t,T),Options, Futures, and Other Derivatives, 5th editi
13、on © 2002 by John C. Hull,24.11,Notation continued,?(t,T1,T2): forward rate as seen at t for the period between T 1 and T 2F(t,T): instantaneous forward rate as seen at t for a contract maturing at Tr(t): s
14、hort-term risk-free interest rate at tdz(t): Wiener process driving term structure movements,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.12,Modeling Bond Prices,Options, Future
15、s, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.13,Modeling Forward RatesEquation 24.7, page 575),Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.14,Tree For a
16、 General Model,,A non-recombining tree means that the process for r is non-Markov,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.15,The LIBOR Market Model,The LIBOR market model is
17、 a model constructed in terms of the forward rates underlying caplet prices,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.16,Notation,Options, Futures, and Other Derivatives, 5th ed
18、ition © 2002 by John C. Hull,24.17,Volatility Structure,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.18,In Theory the L’s can be determined from Cap Prices,Options, Futures,
19、and Other Derivatives, 5th edition © 2002 by John C. Hull,24.19,Example 24.1 (Page 579),If Black volatilities for the first threecaplets are 24%, 22%, and 20%, thenL0=24.00%L1=19.80%L2=15.23%,Options, Futures,
20、 and Other Derivatives, 5th edition © 2002 by John C. Hull,24.20,Example 24.2 (Page 579),Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.21,The Process for Fk in a One-Factor LI
21、BOR Market Model,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.22,Rolling Forward Risk-Neutrality (Equation 24.16, page 579),It is often convenient to choose a world that is always
22、FRN wrt a bond maturing at the next reset date. In this case, we can discount from ti+1 to ti at the di rate observed at time ti. The process for Fk is,Options, Futures, and Other Derivatives, 5th edition © 2002
23、 by John C. Hull,24.23,The LIBOR Market Model and HJM,In the limit as the time between resets tends to zero, the LIBOR market model with rolling forward risk neutrality becomes the HJM model in the traditional risk-neu
24、tral world,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.24,Monte Carlo Implementation of BGM Cap Model (Equation 24.18, page 580),Options, Futures, and Other Derivatives, 5th edit
25、ion © 2002 by John C. Hull,24.25,Multifactor Versions of BGM,BGM can be extended so that there are several components to the volatilityA factor analysis can be used to determine how the volatility of Fk is split i
26、nto components,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.26,Ratchet Caps, Sticky Caps, and Flexi Caps,A plain vanilla cap depends only on one forward rate. Its price is not depe
27、ndent on the number of factors.Ratchet caps, sticky caps, and flexi caps depend on the joint distribution of two or more forward rates. Their prices tend to increase with the number of factors,Options, Futures, and Othe
28、r Derivatives, 5th edition © 2002 by John C. Hull,24.27,Valuing European Options in the LIBOR Market Model,There is a good analytic approximation that can be used to value European swap options in the LIBOR market
29、model. See pages 582 to 584.,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.28,Calibrating the LIBOR Market Model,In theory the LMM can be exactly calibrated to cap prices as describ
30、ed earlierIn practice we proceed as for the one-factor models in Chapter 23 and minimize a function of the formwhere Ui is the market price of the ith calibrating instrument, Vi is the model price of the ith calibrat
31、ing instrument and P is a function that penalizes big changes or curvature in a and s,Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.29,Types of Mortgage-Backed Securities (MBSs),Pas
32、s-ThroughCollateralized Mortgage Obligation (CMO)Interest Only (IO)Principal Only (PO),Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull,24.30,Option-Adjusted Spread(OAS),To calculate
33、the OAS for an interest rate derivativewe value it assuming that the initial yield curve is the Treasury curve + a spreadWe use an iterative procedure to calculate the spread that makes the derivative’s model price
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