22.1 Interest Rate Derivatives The standard market models Chapter 22 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 22.1 Interest Rate Derivatives: The Standard Market Models Chapter 22
22.2 Why Interest rate Derivatives are Much more difficult to Value Than Stock Options We are dealing with the whole term structure of interest rates; not a single variable The probabilistic behavior of an individual interest rate is more complicated than that of a stock price Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 22.2 Why Interest Rate Derivatives are Much More Difficult to Value Than Stock Options • We are dealing with the whole term structure of interest rates; not a single variable • The probabilistic behavior of an individual interest rate is more complicated than that of a stock price
Why Interest Rate Derivatives are 22.3 Much more difficult to value than Stock Options Volatilities of different points on the term structure are different nterest rates are used for discounting as well as for defining the payoff Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 22.3 Why Interest Rate Derivatives are Much More Difficult to Value Than Stock Options • Volatilities of different points on the term structure are different • Interest rates are used for discounting as well as for defining the payoff
22,4 Main approaches to Pricing Interest Rate Options Use a variant of blacks model Use a no-arbitrage ( yield curve based)model Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 22.4 Main Approaches to Pricing Interest Rate Options • Use a variant of Black’s model • Use a no-arbitrage (yield curve based) model
22.5 Blacks model its extensions Blacks model is similar to the Black-Scholes model used for valuing stock options It assumes that the value of an interest rate, a bond price, or some other variable at a particular time T in the future has a lognormal distribution Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 22.5 Black’s Model & Its Extensions • Black’s model is similar to the Black-Scholes model used for valuing stock options • It assumes that the value of an interest rate, a bond price, or some other variable at a particular time T in the future has a lognormal distribution