An interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor).

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Monetary Policy and the Yield Curve PART TWO

The Fed has a number of tools/targets with which they manage monetary policy. I'm looking to refine a concise summary of them and looking for guidance/correction/validation. Think I understand these ...
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30 views

Equitable Allocation

This questions borders on the actuarial side of things but the general solution should have relevance in several situations. Suppose we have a set of $k$ people who will retire in $\{n_1,...,n_k\}$ ...
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57 views

Monetary Policy and the Yield Curve PART ONE

As I understand it, the Fed has 3 tools for moving interest rates to combat inflation/unemployment: the discount rate, Fed Funds rate and open market operations. I'm trying to understand how the ...
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31 views

What does continuously payable annuity mean?

I am preparing for F< exam but I am unable to understand the meaning of continuously payable annuity. What does it mean? An example would be great.
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64 views

How was this probability of negative U.S rates by end 2017 calculated?

http://www.bloomberg.com/news/articles/2016-01-26/bets-on-negative-u-s-rates-by-end-2017-jump-above-10-chance Options markets show some investors are taking out protection in case rates instead ...
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86 views

Timesteps in Vasicek model

When simulating stocks one can easily use GBM with only one random variable per simulation to create a new stock price in say 5 years, you don't need to create the whole asset paths if you don't need ...
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50 views

Bond Convexity: Relationship between discrete and continuous interest rate

The interest rate risk of a bond price $P$ is measured by its Duration: $$D=-\frac{\frac{dP}{P}}{dr}$$ However, the explicit formula for the Duration given a function $P$ is different if $r$ is ...
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82 views

Reverse Repos as a means to adjust interest rates

How does the NY Fed's trading desk use this process as a tool to adjust bond prices?
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61 views

How do we include inflation in our calculations? [closed]

How do we include inflation in our compound interest calculations? E.g. if we have current principal of 1000$ and the interest rate is 3% after 10 years we have ...
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35 views

Return, STD and CAPM based on Continuously compound return on daily prices

Mission: For some ETF, Get 1, 3, 5 years: Return STD CAPM parameters (alpha, beta) Reference if I calculated correctly: Yahoo finance performance & risk data Raw data: Daily adj. close ...
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18 views

Interest rate: Treasury Note, Stripped Principal

Ok, So I'm a little confused about this. I want to solve an exercise and derive an optimal product, but in order to do that, I need the interest rates for each of the maturities of my options. I ...
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192 views

Dec 16: FED rate hike?

Various news articles state that next Wednesday a rate hike by the FED was expected. Yet when I look at fed-rate futures, nobody seems to expect that: ...
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78 views

How to get real interest rate from Nominal spot rates?

I have the nominal spot rates. Based on the Fisher equation , how to get the real interest rate ($r$) and the "expected inflation" ($\pi$) ?
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24 views

CIR model, realistic parameters and usage

I'm currently working on SDE's, in particular with mean-reversion processes like CIR and Vasicek. The definition of the CIR model is \begin{equation} dX_t = \kappa(\theta-X_t)dt + \sigma ...
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266 views

How to calculate daily risk free interest rates

I'm working on an assignment in which I need to calculate excess return for six stocks plus the S&P 500. I have computed daily logarithmic returns for every stock and for the market, I now need to ...
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2answers
81 views

Implications of Black Scholes Plot

I'm pretty new to finances, but I'm heavily into scientific computation. For my scientific computations class, I need to have at least a basic understanding of finances for the presentation I'm going ...
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151 views

Estimating Parameters - Vasicek

The Vasicek model for the short rate $r_t$ is given by the SDE $$ dr_t = \alpha(\beta - r_t)dt + \sigma dW_t, $$ where $W_t$ is a Brownian motion under the physical measure. I'd like to compute bond ...
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1answer
65 views

Why financial instistution for instance banks lowered down their interest rate during QE?

When QE is carried out, the Federal Reserve prints money and buy government bonds in an effort to pour extra money into the economy. This causes financial institutions for instance banks to lowered ...
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156 views

Why Central Bank carry out Qe when they can directly force banks to lower down the interest rate?

To boost the economy, the central bank can do it either by lowering down the interest rate nor carry out QE. But QE objective is to lowered the interest rate also so banks can give out more loan. This ...
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30 views

Expectation of expression with two currencies under forward measure

I'm trying to calculate the expected value, at time $0$, of a cashflow paid at time $T$, resetting at time $t$. The coupon is of the form: ...
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61 views

Data source for a corporate bond yield curve?

Yield curves are a valuable tool for economic analysis. It is particularly interesting to analyse the difference between Government Debt yields and Corporate Debt yields (credit spreads). This gives ...
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41 views

Swaption on a swap with 0 year tenor

Any ideas on valuation of IRS swaption on a swap with 0 year tenor? As an example, we have a 5 year swaption, on expiration it is cash settled; the underlying swap tenor is 0 years with excercise and ...
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2answers
95 views

Bond Prices in terms of short and forward rates

Of course, a pure discount bond price $P(t,T)$ may be stated in terms of its yield $R(t,T)$ as $$ P(t,T) = e^{-R(t,T)(T-t)}. $$ Let's assume both the (instantaneous) short rate $r(t)$ and ...
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49 views

Interest Rate and Price of Assets

I have a very basic question about finance. I know that for an asset, the price is inversly related to the yield to maturity, or the interest rate. However, I have three ways of thinking about this ...
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58 views

“Spot rate is not observable” meaning

In Bruno Remillard's text, "Statistical Methods for Financial Engineering," he states the following on p 148 after giving the general form of a bond price $P(t,T)$ under Vasicek's model: Note that ...
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93 views

difference between caplet and call

I wanted to know the difference between a caplet and a call. In my course (Interest rate models and curves) , we said that a caplet is a call option. Is it really true? Thanks
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37 views

“Economic” Variables in Short Rate Models

Hull (9 ed.) states on p 707, "Equilibrium models usually start with assumptions about economic variables and derive a process for the short rate..." He then states the usual short rate models ...
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45 views

Stressing the going up of LIBOR - Which balance sheet variables to stress?

Analysts expect the LIBOR to rise in the next two years. Hence, all companies that have foreign currency loans will face problems. I am preparing a study on this topic, but data is an extreme issue. ...
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61 views

How to use Euler discretization for this interest rate model?

How can I perform Euler discretization on this model where $\delta t=1$ and $\delta x_t = x_t-x_{t-1}$
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54 views

Applying interest rate models for volaility rate

To what extent may the interest rate models be applied for modeling implied volatity? The story: I was checking different stochastic option pricing models for being able to replicate implied ...
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70 views

State of Art - Nelson Siegel Modeling

My idea is to work with dynamic Nelson Siegel models(DNS) on my master's thesis. As I am finishing undergraduation this year I started researching on the subject. I wonder what is being discussed in ...
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62 views

Fed Funds Rate - why has it just started decreasing on the final day of each month (vs quarter)

I understand why the Fed Funds rate has historically dropped on the final day of each quarter, but in 2015 it appears that the effective Fed Funds rate now drops on the final day of each month as ...
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36 views

MLE for two independent factor CIR

Following the maximun likelihood estimation as done in Klavidko I would like to generalize this to more independent factors . In first istance I would use the transition function at time t as a sum ...
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115 views

Why is it useless to model stochastic volatility when pricing Vanilla style derivatives?

With respect to the answer by user AFK in Ideas about Stochastic volatility models. I am specifically interested in interest rate options (IR Caps/Floors and Swaptions).
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66 views

Interest rate models

I'm studying by myself how to model interest rates. Is there any database in which I can find accurate data for indices like Libor, Euribor, Eonia etc?
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76 views

can an fx forward price simply be divided into 1 to quote the inverse?

Qu 1. Say I ask for EURUSD 1 week and get prices: 1.120986 / 1.120216 Does that mean to price USDEUR 1 week I can divide 1 / 1.120216 and 1 / 1.120986 and get rates: 0.8921 / 0.8927 Or is that ...
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60 views

Immunization: Whats the best way to hedge my short interest rate exposure?

What's the best way to hedge a portfolio against a rise in rates? Portfolio: long bonds different maturities. a) parallel shift b) convex shift (short and long term rise more than mid term) How is ...
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60 views

What is an estimated rise in the interest rate of the 10-year Treasury in this scenario?

Suppose that the Federal Reserve had raised interest rate by 0.25% last week 17Sep2015. What is an estimated rise in the interest rise of the 10-year Treasury? Which futures contract should one use to ...
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Will rolling-down-yield-curve bond strategy work if interest rates remain unchanged?

Suppose I have 2 strategies; A) Buying A One Year Bond And Holding To Maturity (Buy & Hold To Maturity) B) Buying A 3 Year Bond and Selling After One Year (Rolling Down The Yield Curve) Assume ...
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133 views

Simple question about FX carry trade

I have been reading online about the FX carry trade and how this can be profitable (in general). From my understanding, the idea is to be long (lend) the currency with higher interest rate and short ...
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89 views

Fed FOMC Target Rate annnouncement machine readable data point

Does anyone know if there is a near-realtime machine-readable feed that reflects the FOMC target rate announcement? The announcement came in today at 2 pm, but I can't find a way to download the ...
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104 views

Function A(t,T) in one-factor Hull-White model

I am struggling with Hull-White model now and have the following question: in the lecture notes under the link below I see how A(t,T) and B(t,T) are being derived. This requires the solution of ...
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64 views

What is this ratio: expected returns on stock divided by risk free rate?

So this ratio has come up in some work I'm doing and I can't seem to figure out if it is attested in the literature. Here's the setting: Given a risk free rate $r(t)$ and a stock price which follows ...
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165 views

Historical calibration of Hull-White model

I have a question concerning 1-factor Hull-White model. For my master project I need to calibrate it to compute Counterparty credit risk metrics. I know that the model might be calibrated either for ...
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37 views

The calculation of NIBID rate from 2013 by using NIBOR rate (UIP)

I need to calculate the NIBID rates from 2013. I have the NIBOR as a starting point and some indications but I am still quite confused. I found some advices online, but it does not seem to get me the ...
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38 views

Whats the formula to calculate the FV, incorporating monthly deposits?

I need a Formula to calculate the future value of an investment based on current principal, interest, number of years, compounding interval (times annually) and monthly deposit. So basically ...
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1answer
140 views

Derive OIS rate from IRS rate and Fed Funds/Libor basis spread

For example I have 7Y interest rate swap rate and 7Y Fed funds/Libor basis spread. What is the step-by-step procedure to derive OIS rate from these two?
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253 views

Weights Blowing up in PCA

I'm using daily settlement data to get yield levels for a couple of products. From this data I am doing PCA on a rolling collection of the yield levels. I have been using sci-kit learn's PCA function, ...
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117 views

Bond price in Ho-Lee Model

I know Ho-Lee model and want to extract the price at $t$, of a European call option with strike price $K$ and exercise date $T$, on an underlying $S$-bond, but I don't know what way should I choose: ...
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184 views

U.S. Rate Hike Prediction

In a recent ft.com video an analyst mentioned that markets postponed their Fed rate hike expectation from September to around November 2015 due to the CNY devaluation, based on the "shift" of some ...