This course outline is currently unavailable. Please visit our archives to view previous course outlines.
Focuses on the practical methods for valuing, hedging and managing interest rate derivatives. Begins with a review of the standard pricing framework for interest rate derivatives such as bond options, caps and floors and points out its limitations; followed by and in-depth study of common interest rate models, including Vasicek, Cox-Ingersoll-Ross, Ho-Lee, Hull-White, Black-Derman-Toy, and Black-Karasinski. Advantages and disadvantages as well as the issue of the analytic tractability of these models are examined. The more general and consistent interest rate framework of Heath-Jarrow-Morton is introduced and the links to earlier models; LIBOR market model of Brace-Gatarek-Musiela and its application to the pricing of caps, floors and swaptions are studied. Methods for estimating the model parameters, such as the maximum likelihood estimation and calibration to market prices, and numerical methods for computing derivative prices, such as the lattice and Monte Carlo methods, are presented and the practical issues of constructing reliable forward rate curves. Forward rate volatility curves are addressed.