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    Unit 10 Slides

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    Arthur Bielewicz
    This document provides an overview of various mathematical models for pricing options, including interest rate models, forward rate models, and credit risk models. It introduces bond pricing as an expected value calculation and discusses interest rate tree models. Continuous-time interest rate models like Vasicek and Cox-Ingersoll-Ross are presented. Forward rate models such as Heath-Jarrow-Morton and BGM are covered. The change of numeraire pricing method and its application to bond options is explained. Finally, structural and reduced-form credit risk models are introduced. The content is based on a book on financial mathematics.

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    Unit 10 Slides

    Uploaded by

    Arthur Bielewicz
    11 views37 pages
    This document provides an overview of various mathematical models for pricing options, including interest rate models, forward rate models, and credit risk models. It introduces bond pricing as an expected value calculation and discusses interest rate tree models. Continuous-time interest rate models like Vasicek and Cox-Ingersoll-Ross are presented. Forward rate models such as Heath-Jarrow-Morton and BGM are covered. The change of numeraire pricing method and its application to bond options is explained. Finally, structural and reduced-form credit risk models are introduced. The content is based on a book on financial mathematics.

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    This document provides an overview of various mathematical models for pricing options, including interest rate models, forward rate models, and credit risk models. It introduces bond pricing as an expected value calculation and discusses interest rate tree models. Continuous-time interest rate models like Vasicek and Cox-Ingersoll-Ross are presented. Forward rate models such as Heath-Jarrow-Morton and BGM are covered. The change of numeraire pricing method and its application to bond options is explained. Finally, structural and reduced-form credit risk models are introduced. The content is based on a book on financial mathematics.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    11 views37 pages

    Unit 10 Slides

    Uploaded by

    Arthur Bielewicz
    This document provides an overview of various mathematical models for pricing options, including interest rate models, forward rate models, and credit risk models. It introduces bond pricing as an expected value calculation and discusses interest rate tree models. Continuous-time interest rate models like Vasicek and Cox-Ingersoll-Ross are presented. Forward rate models such as Heath-Jarrow-Morton and BGM are covered. The change of numeraire pricing method and its application to bond options is explained. Finally, structural and reduced-form credit risk models are introduced. The content is based on a book on financial mathematics.

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    © All Rights Reserved
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    of 37

    Pricing Options with Mathematical Models

    29. Introduction to interest rate


    models

    Some of the content of these slides is based on material from the


    book Introduction to the Economics and Mathematics of Financial
    Markets by Jaksa Cvitanic and Fernando Zapatero.
    Bond price as expected value
    Price of bond option as expected value
    Interest Rate Tree

    ruuu
    1
    ruu
    ruud
    ru P(2,3)
    rud 1
    r P(1,3)
    P(0,3) rd rudd
    P(2,3)
    rdd 1
    P(1,3)
    rddd
    P(2,3)
    1
    Example
    Example (continued)
    Pricing Options with Mathematical Models

    30. Continuous-time interest rate models

    Some of the content of these slides is based on material from the


    book Introduction to the Economics and Mathematics of Financial
    Markets by Jaksa Cvitanic and Fernando Zapatero.
    Modeling the short rate
    Vasicek model
    Cox-Ingersoll-Ross (CIR) model
    More one-factor models
    Affine models of the term structure
    Affine models (continued)
    Pricing Options with Mathematical Models

    31. Forward rate models

    Some of the content of these slides is based on material from the


    book Introduction to the Economics and Mathematics of Financial Markets by
    Jaksa Cvitanic and Fernando Zapatero.
    Forward rates
    Heath-Jarrow-Morton (HJM) model
    HJM model (continued)
    HJM example
    BGM market model
    Pricing a caplet in the market model
    A general way to price a caplet
    A general way to price a caplet (continued)
    Pricing Options with Mathematical Models

    32. Change of numeraire method

    Some of the content of these slides is based on material from the


    book Introduction to the Economics and Mathematics of Financial Markets by
    Jaksa Cvitanic and Fernando Zapatero.
    Other pricing probabilities
    Example
    Black-Scholes-Merton formula for bond options
    Bond option example
    Pricing Options with Mathematical Models

    33. Introduction to credit risk models

    Some of the content of these slides is based on material from the


    book Introduction to the Economics and Mathematics of Financial Markets by
    Jaksa Cvitanic and Fernando Zapatero.
    Structural models
    Structural models (continued)
    Reduced-form, intensity models
    Reduced-form, intensity models (continued)

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