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Interest Rate Derivatives Explained: Volume 2
Term Structure and Volatility Modelling
Jörg Kienitz,Peter Caspers
- English
- PDF
- Available on iOS & Android
Interest Rate Derivatives Explained: Volume 2
Term Structure and Volatility Modelling
Jörg Kienitz,Peter Caspers
About This Book
This book on Interest Rate Derivatives has three parts. The first part is on financial products and extends the range of products considered in Interest Rate Derivatives Explained I. In particular we consider callable products such as Bermudan swaptions or exotic derivatives. The second part is on volatility modelling. The Heston and the SABR model are reviewed and analyzed in detail. Both models are widely applied in practice. Such models are necessary to account for the volatility skew/smile and form the fundament for pricing and risk management of complex interest rate structures such as Constant Maturity Swap options. Term structure models are introduced in the third part. We consider three main classes namely short rate models, instantaneous forward rate models and market models. For each class we review one representative which is heavily used in practice. We have chosen the Hull-White, the Cheyette and the Libor Market model. For all the models we consider the extensions by a stochastic basis and stochastic volatility component. Finally, we round up the exposition by giving an overview of the numerical methods that are relevant for successfully implementing the models considered in the book.
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Table of contents
- Contents
- List of Figures
- List of Tables
- Goals of this Book and Global Overview
- Products
- 1 Vanilla Bonds and Asset Swaps
- 2 Callability Features
- 3 Structured Finance
- 4 More Exotic Features and Basis Risk Hedging
- 5 Exposures
- Volatility
- 6 The Heston Model
- 7 The SABR Model
- Term Structure Models
- 8 Term Structure Models
- 9 Short Rate Models
- 10 A Gaussian Rates-Credit Pricing Framework
- 11 Instantaneous Forward Rate Models and the Heath--Jarrow--Morton Framework
- 12 The Libor Market Model
- A Numerical Techniques for Pricing and Exposure Modelling
- A.1 Numerical Integration
- A.1.1 Greeks
- A.2 Fourier Transformation
- A.2.1 Greeks
- A.3 Finite Difference Techniques
- A.3.1 Finite Differences
- A.3.2 Finite Difference Schemes
- A.3.2.1 Inner Scheme
- A.3.2.2 Boundary Conditions
- A.3.3 Consistency/Stability/Convergence
- A.3.4 Solving for the Density
- A.3.5 Solving for the Price
- A.4 Monte Carlo Simulation
- A.4.1 Random Numbers
- A.4.1.1 Uniformly Distributed Randoms
- A.4.1.2 Multiple Dimensions
- A.4.1.3 Transforming to a Given Distribution
- A.4.1.4 Multiple Dimensions
- A.4.1.5 The Cholesky Decomposition
- A.4.2 Path Simulation
- A.4.2.1 The Exact Scheme
- A.4.2.2 The Euler Scheme
- A.4.2.3 The Predictor-Corrector Scheme
- A.4.2.4 The Milstein Scheme
- A.4.3 Averaging and Error Analysis
- A.4.4 Special Purpose Schemes
- A.5 The Longstaff-Schwartz Method
- A.6 Further Considerations
- References
- Index