Valuation of Path-Dependent Interest Rate Derivatives in a Finite Difference Setup
AbstractIn this paper we study and implement a finite diﬀerence version of the augmented state variable approach proposed by Hull & White (1993) that allows for pathdependent securities. We apply the method to a class of path-dependent interest rate derivatives and consider several examples including mortgage backed securities and collateralized mortgage obligations. The eﬃciency of the method is assessed in a comparative study with Monte Carlo simulation and we find it to be faster for a similar accuracy.
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Bibliographic InfoPaper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Working Papers with number 02-21.
Length: 20 pages
Date of creation: 09 May 2003
Date of revision:
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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
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Path-dependent Options; Finite Difference; Mortgage Backed Securities;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-05-15 (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.:
- Stanton, Richard & Wallace, Nancy, 1999. "Anatomy of an ARM: The Interest-Rate Risk of Adjustable-Rate Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 19(1), pages 49-67, July.
- Schwartz, Eduardo S & Torous, Walter N, 1989. " Prepayment and the Valuation of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 44(2), pages 375-92, June.
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