The interest-rates tag has no wiki summary.
3
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3answers
408 views
What are the limits of bond portfolio immunization against interest rate changes?
I'm currently reading through an article on bond portfolio immunization against changes in the interest rate.
I learned that the immunization can be done against instant changes in interest rate ...
6
votes
3answers
1k views
What is a real world example of negative forward interest rate?
As the title says, I am looking for a real world example where a forward interest rate is negative.
Theoretically this is not a problem at all, if I look for a 3M forward interest rate that starts ...
9
votes
4answers
710 views
Is the risk-free rate really limited by inflation?
In all the classic texts on equities derivatives, there is an assumption of the risk-free rate r. We can immediately dismiss the concept of a fixed rate; all interest rates are variable (and ...
13
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2answers
571 views
Why isn't the Nelson-Siegel model arbitrage-free?
Assume $X_t$ is a multivariate Ornstein-Uhlenbeck process, i.e.
$$dX_t=\sigma dB_t-AX_tdt$$
and the spot interest rate evolves by the following equation:
$$r_t=a+b\cdot X_t.$$
After solving for $X_t$ ...
4
votes
1answer
187 views
What's the best way to test/validate an interest rate lattice model
I have some implementations of interest rate lattice models. I would like to verify their performance. What would be the best approaches?
Currently I compare pricings of some interest rate dependent ...
5
votes
3answers
419 views
Pricing callable range accruals on spreads
What is an efficient method of pricing callable range accruals on rate spreads? As an example:
A cancellable 30 year swap which pays 6M Libor every 6M multiplied by the number of days the spread of ...
3
votes
1answer
2k views
Deriving spot rates from treasury yield curve
I've been experimenting with bond pricing using easily available data (treasury auction prices and treasury yield curves on treasury direct).
At first I assumed that I could use the components yield ...
5
votes
1answer
87 views
How to remove the risk element from a set of fixed rate mortgage offerings?
Kept waiting in the bank yesterday, with no paint to watch dry, I found myself staring at the mortgage rates. (These are all annual interest rates):
Variable: 2.475%
1 year: 2.90%
2 years: 3.05%
3 ...
8
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1answer
294 views
Where can I find data on the interbank lending market?
Where can I find disaggregated interbank lending data (i.e. bank A lends to bank B x money at y rate)? I could only find data on interest rates.
I would accept LIBOR market data as well as any ...
6
votes
1answer
129 views
Should we apply practical constraints on the distribution of monte carlo paths?
to limit interest rate paths to a 'reasonable' range (if we could define reasonable). Now we calibrate log-normal skew and mean reversion monthly to robust basket of atm swaptions and in and out ...
6
votes
2answers
677 views
Is Duration really the slope of the Price-Yield curve?
When looking at the Price-vs-Yield graph for a fixed rate instrument, we are often told that the duration is the slope of that curve. But is that really right?
Duration is (change in price) divided ...
6
votes
2answers
600 views
Why is the SABR volatility model not good at pricing a constant maturity swap (CMS)?
I have heard that the SABR volatility model was not good at pricing a constant maturity swap (CMS). How is that?
4
votes
2answers
252 views
Which interest rate should I use for the discount rate in real-world pricing?
Suppose I want to compute the time value of money (present value, future value, etc). I need to put an interest rate into the calculation.
Which real world interest rate would best be used here, ...
10
votes
3answers
680 views
Rate interpolation in Libor Market Model
Libor Market Model (LMM) models the interest rate market by simulating a set of simply compounded, non-overlapping Libor rates which reset and mature on predefined dates. How do I obtain from them a ...
9
votes
2answers
405 views
When is the LIBOR market model Markovian?
The question is inspired by a short passage on the LMM in Mark Joshi's book.
The LMM cannot be truly Markovian in the underlying Brownian motions due to the presence of state-dependent drifts. ...
3
votes
1answer
207 views
Value of option-free instruments with a short-rate model vs the spot curve
You can calculate the value of an option free bond or swap by using the spot curve and discounting cashflows accordingly. Alternatively, apparently you can use a single-factor short rate model in a ...
5
votes
1answer
209 views
How to value a floor when a loan is callable?
Certain bank loans pay a spread above a floating-rate interest rate (typically LIBOR) subject to a floor. I would like to find the value of this floor to the investor. Assume for this example that ...
7
votes
2answers
967 views
Which risk-free rate to use to price a bond issued in one currency but convertible into equity in another?
A convertible bond denominated in USD is issued by an Indian company (with equity traded in INR). The bond will be repaid in USD and if converted into equity in the company, the conversion price will ...
6
votes
1answer
240 views
How to reduce variance in a Cox-Ingersoll-Ross Monte Carlo simulation?
I am working out a numerical integral for option pricing in which I'm simulating an interest rate process using a Cox-Ingersoll-Ross process. Each step in my Monte Carlo generated path is a ...
7
votes
1answer
381 views
What are the most common/popular exotics in the interest rate markets these days?
By "exotic" I mean anything that is not a plain vanilla swap, swaption, cap or floor. Also any IR hybrids if appropriate.
Possible examples would be:
CMS and CMS spread options
Multi-callable swaps
...
7
votes
1answer
1k views
What is the reason for the convexity adjustment when pricing a constant maturity swap (CMS)?
I'm trying to wrap my head around pricing a Constant Maturity Swap (CMS). Let's imagine the following deal: 6m LIBOR in one direction, 10y swap rate in the other. The discount curve is derived from ...
5
votes
1answer
308 views
What is the forward rate for a Black-Karasinski interest rate model?
I was wondering if anyone could help me with the instantaneous forward rate equation for a Black-Karasinski interest rate model?
I was also after the Black-Karasinski Bond Option Pricing Formula.
6
votes
1answer
229 views
How to build the short end of a zero coupon curve for non-core Eurozone countries?
I am in the process of building zero coupon curves for some countries in the Eurozone.
I have the following data sets:
Euribor and EONIA
Swap rates
Bond price and yields
The bond prices (and thus ...
4
votes
1answer
273 views
Is there any gamma in basis (i.e., floating for floating) interest rates swaps?
It is well known that vanilla fixed for floating swaps usually have a bit of gamma, but does a floating for floating (basis) swap have any? For the sake of simplicity, let's assume that both legs of ...
4
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1answer
155 views
How to scale option pricing components in regard to time
I am looking at closed-form options approximations, in particular the Bjerksund-Stensland model.
I have run into a very basic question. How should I scale the input variables in regard to time? My ...
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0answers
200 views
how does rise of china interest rate affect the inflation ? [closed]
I heard not long ago that because of inflation rising up in China, the China Bank will rise its interest rate of 0.25%.
I am quite new to the financial world and do not really understand how this is ...
3
votes
2answers
232 views
Bank of England base rate feed
I am implementing a program in Java that needs the Bank of England base rate. Rather than the user inputting this into the system, I have heard that there is a way to get a live feed of the base rate ...
3
votes
2answers
347 views
Need advice on finding forward spot rates
So this is a "work homework" question. As part of my job they are sending us through sort of a training course. I'm looking for advice, or a link to a site that explains how to do this with maybe some ...
4
votes
4answers
359 views
Expected Growth
The model assumption of the Black-Scholes formula has two parameters for the geometric Brownian motion, the volatility $\sigma$ and the expected growth $\mu$ (which disappears in the option formulae). ...
