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Description of Interest–Rate Option Models

"Overall this book provides an excellent summary of the state of knowledge of term structure modelling. It combines a solid academic background with the practical experience of someone who works in the financial sector." Alan White and John Hull, A–J Financial Systems, Canada



The modelling of exotic interest–rate options is such an important and fast–moving area, that the updating of the extremely successful first edition has been eagerly awaited. This edition re–focuses the assessment of various models presented in the first edition, in light of the new developments of modelling imperfect correlation between financial quantities. It also presents a substantial new chapter devoted to this revolutionary modelling method. In this second edition, readers will also find important new data dealing with the securities markets and the probabilistic/stochastic calculus tools. Other changes include: a new chapter on the issues arising in the pricing of several classes of exotic interest–rate instruments; and insights from the BDT and the Brennan and Schwartz approaches which can be combined into a new class of "generalised models". Further details can be found on the links between mean–reversion and calibration for important classes of models.

Title Information

ISBN:

9780471979586

Pages:

546 pages

Format:

Hardback

Product Code:

9564

Publisher:

John Wiley & Sons Ltd

Published:

27/03/1998

Edition:

Second Edition

Press and Industry Reviews

'Overall this book provides an excellent summary of the state of knowledge of term structure modelling. It combines a solid academic background with the practical experience of someone who works in the financial sector.'
Alan White and John Hull, A-J Financial Systems, Canada

'From the basics of swap and forward contracts through to the most complex exotic interest-rate options, Rebonato provides a comprehensive and unified treatment of this exciting area. I thoroughly recommend this book to both academics and practitioners. Academics will learn about the practical difficulties of applying theory. Practitioners will gain insight into the often implicit assumptions that lie behind the procedures they use.'
Ian Cooper, Professor of Finance, London Business School

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About Riccardo Rebonato

Dr Riccardo Rebonato is Director and Head of Research at Barclays Capital. He is responsible for the modelling,trading, and risk management of the European exotic interest–rate products. He holds Doctorates in Nuclear Engineering and Science of Materials/Solid State Physics. Before moving into investment banking he was Research Fellow in Physics at Corpus Christi College (Oxford). He has published papers in several academic journals in finance, and is a regular speaker at conferences worldwide.

Contents of Interest–Rate Option Models

Preface to the Second Edition

Preface to the First edition

List of Symbols and Abbreviations

Part One: The Need For Yield Curve Option Pricing Models
1. Definition and valuation of underlying instruments
2. Exotic interest-rate instruments: description and valuation Issues
3. A statistical approach to yield curve models
4. Correlation, average and instantaneous volatilities, and their impact on the pricing of LIBOR options
5. A motivation for yield curve models

Part Two: The Theoretical Tools
6 Establishing a pricing framework
7. The conditions for no-arbitrage

Part Three: The Implementation Tools
8. Lattice methods
9. The partial differential equation (PDE) approach
10. Monte Carlo approaches

Part Four: Analysis of Specific Models
11. The CIR and Vasicek Models
12. The Black Derman and Toy Model
13. The Hull and White approach
14. The Longstaff and Schwartz Model
15. The Brennan and Schwartz Model
16. A Class of Arbitrage-Free Log-Normal Short-Rate Two-Factor Models
17. The Heath Jarrow and Morton approach
18. The Brace-Gatarek-Musiela/Jamshidian approach

Part Five: General Topics
19. Affine Models
20. Markovian and non-Markovian interest-rate models
21. Calibration to cap prices of mean-reverting log-normal short-rate models

Appendix A Elements of Probability and Stochastic Calculus
Appendix B The Securities Market