Interest-Rate Option Models - Rebonato

Written by an acknowledged expert in option modeling, this extensively revised and expanded Second Edition explains option models at both the theoretical and practical levels. It introduces readers to the best models used by traders globally, describes how they are generally implemented, and provides pointers on how to select and use the best models for specific trading circumstances.

Interest-Rate Option Models, second edition, presents in a unified way the theoretical and practical issues involved in the pricing of exotic interest-rate options. Despite the fact that relatively complex mathematical concepts are introduced and used in the book, financial intuition, rather than mathematical rigor, is emphasized throughout. The book is split into five distinct parts: 1) The Need for Yield Curve Option Pricing Models; 2) The Theoretical Tools; 3) The Implementation Tools; 4) Analysis of Specific Models; 5) General Topics.

  • Level: Intermediate+
  • Major Topics: T22, T21, T23
  • Minor Topics: T11, T24, T25


Table of Contents

Part 1. The Need for Yield Curve Option Pricing Models
1. Definition and Valuation of the Underlying Instruments
2. Exotic Interest-Rate Instruments: Description and Valuation Issues
3. A Statistical Approach to Yield Curve Models
4. Correlation, Average, and Instantaneous Volatilities, and Their Impact on the Pricing of LIBOR Options
5. A Motivation of Yield Curve Models

Part 2. The Theoretical Tools
6. Establishing a Pricing Framework
7. The Conditions of No-Arbitrage

Part 3. The Implementation Tools
8. Lattice Methods
9. The Partial Differential Equation (PDE) Approach
10. Monte Carlo Methods

Part 4. Analysis of Specific Models
11. The CIR and Vasicek Models
12. The Black Derman and Toy Model
13. The Hull and White Approach
14. The Longstaff and Schwartz Model
15. The Brennan and Schwartz Model
16. A Class of Arbitrage-Free Log-Normal Short-Rate Two-Factor Models
17. The Heath Jarrow and Morton Approach
18. The Brace-Gatarek-Musiela/Jamshidian Approach

Part 5. General Topics
19. Affine Models
20. Markovian and Non-Markovian Interest-Rate Models
21. Calibration to Cap Prices of Mean-Reverting Log-Normal Short-Rate Models…read more