Risk Management Of Bonds And Interest Rate Sensitive Instruments In The Presence Of Stochastic Interest Rates And Information Uncertainty: Theory And Tests

The following sections are included:Chapter OutlineIntroductionThe Valuation of Bond Options and Interest Rate OptionsThe problems in using the B–S model for interest-rate optionsSensitivity of the theoretical option prices to changes in factorsA Simple Non-Parametric Approach to Bond Futures Option PricingCanonical modeling and option pricing theoryAssessing the distribution of the underlying futures priceTransforming actual probabilities into risk-neutral probabilitiesQualitative comparison of Black and canonical model valuesOne-Factor Interest Rate Modeling and the Pricing of Bonds: The General CaseBond pricing in the general case: The arbitrage argument and information costsPricing callable bonds within information uncertaintyFixed Income Instruments as a Weighted Portfolio of Power OptionsMerton's Model for Equity Options in the Presence of Stochastic Interest Rates: Two-Factor ModelsThe model in the presence of stochastic interest ratesApplications of Merton's modelSome Models for the Pricing of Bond OptionsAn extension of the Ho-Lee model for bond optionsThe Schaefer and Schwartz modelThe Vasicek (1977) modelThe Ho and Lee modelThe Hull and White modelSummaryQuestionsAppendix A: Government Bond Futures and Implicit Embedded OptionsCriteria for the CTDYield changesThe value for a futures positionParallel yield shiftRelative yield shiftAppendix B: One-Factor Fallacies for Interest Rate ModelsThe models in practiceSpreads between ratesAppendix C: Merton's Model in the Presence of Stochastic Interest RatesReferences