IDEAS home Printed from https://ideas.repec.org/h/spr/dymchp/978-3-662-45906-5_23.html
   My bibliography  Save this book chapter

Interest Rate Derivatives: One Factor Spot Rate Models

In: Derivative Security Pricing

Author

Listed:
  • Carl Chiarella

    (University of Technology Sydney)

  • Xue-Zhong He

    (University of Technology Sydney)

  • Christina Sklibosios Nikitopoulos

    (University of Technology Sydney)

Abstract

In this chapter we survey models of interest rate derivatives which take the instantaneous spot interest rate as the underlying factor. The continuous hedging argument is extended so as to model the term structure of interest rates and other interest rate derivative securities. This basic approach is due to Vasicek (J Financ Econ 5:177–188, 1977) Vasicek, O. and hence we shall often refer to it as the Vasicek approach. By specifying different functional forms for the drift, the diffusion and the market price of risk, we develop three well known spot rate models, namely the Vasicek model, the Hull–White model and the Cox–Ingersoll–Ross model. Then we present a general framework for pricing bond options and we apply this framework to obtain closed form solutions for bond options under the specifications of the Hull–White and the Cox–Ingersoll–Ross model. Finally we discuss the calibration of the Hull–White model to the currently observed yield curve.

Suggested Citation

  • Carl Chiarella & Xue-Zhong He & Christina Sklibosios Nikitopoulos, 2015. "Interest Rate Derivatives: One Factor Spot Rate Models," Dynamic Modeling and Econometrics in Economics and Finance, in: Derivative Security Pricing, edition 127, chapter 0, pages 469-504, Springer.
    • Handle: RePEc:spr:dymchp:978-3-662-45906-5_23
    DOI: 10.1007/978-3-662-45906-5_23
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:dymchp:978-3-662-45906-5_23. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.