Yield to maturity modelling and a Monte Carlo Technique for pricing Derivatives on Constant Maturity Treasury (CMT) and Derivatives on forward Bonds
AbstractThis paper proposes a Monte Carlo technique for pricing the forward yield to maturity, when the volatility of the zero-coupon bond is known. We make the assumption of deterministic default intensity (Hazard Rate Function). We make no assumption on the volatility of the yield. We actually calculate the initial value of the forward yield, we calculate the volatility of the yield, and we write the diffusion of the yield. As direct application we price options on Constant Maturity Treasury (CMT) in the Hull and White Model for the short interest rate. Tests results with Caps and Floors on 10 years constant maturity treasury (CMT10) are satisfactory. This work can also be used for pricing options on bonds or forward bonds.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1204.4631.
Date of creation: Apr 2012
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-02 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eric Benhamou, 2000. "Pricing Convexity Adjustment with Wiener Chaos," FMG Discussion Papers dp351, Financial Markets Group.
- Eric Benhamou, 2002. "A Martingale Result for Convexity Adjustment in the Black Pricing Model," Finance 0212005, EconWPA.
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