New answers tagged


There is a lot of prepayment models for MBS, mostly every big bank has its own proprietary model. But the prepayment model can take into account many variables than only interest rate. A probability of prepaymet also depends on geographical location of a debtor (for example there is a lower probability that a mortgage would be prepaid in New York than in ...


In my understanding, the mortgage prepayment option, at any point in time, is a function of the value of the mortgage from that point in time forward. This value, in turn, is a function of the future evolution of the interest rates and any optimal decision taken by the mortgagor along that path and all paths that evolve from any future 'branch'. So in ...


Each path is evolved based on the vol and a random number. The higher the vol the more the paths will diverge. Paths will diverge if you increase time as well. The solution is to increase the number of paths as vol or time increases to get a standard deviation of terminal values that you are comfortable with.


It is due the number of timestamps in your case. Actually, as the ZC rate is zero, the price of European and american options should be the same. EDIT PROOF: You know that for american options (see proof in pages 4,5 HERE): $S_T-K\leqslant C-P \leqslant S_T-Ke^{-rT}$ When the risk free rate is zero, you get that the call put parity remains valid $S_T-K= ...

Top 50 recent answers are included