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Short-term interest rate models: valuing interest rate derivatives using a Monte-Carlo approach

Treepongkaruna, Sirimon; Gray, Stephen

Description

This paper provides an accessible description and several examples of how to use Monte-Carlo simulation to value interest rate derivatives when the short rate follows an arbitrary time series process. We compare the values of various interest rate derivatives using closed-form solutions (when available), the Hull and White (1994) trinomial tree procedure, and a Monte-Carlo simulation technique. We show that the simulation technique can be applied to more complex short rate processes by...[Show more]

dc.contributor.authorTreepongkaruna, Sirimon
dc.contributor.authorGray, Stephen
dc.date.accessioned2015-12-13T22:30:25Z
dc.date.available2015-12-13T22:30:25Z
dc.identifier.issn0810-5391
dc.identifier.urihttp://hdl.handle.net/1885/74835
dc.description.abstractThis paper provides an accessible description and several examples of how to use Monte-Carlo simulation to value interest rate derivatives when the short rate follows an arbitrary time series process. We compare the values of various interest rate derivatives using closed-form solutions (when available), the Hull and White (1994) trinomial tree procedure, and a Monte-Carlo simulation technique. We show that the simulation technique can be applied to more complex short rate processes by examining short rate models where the dynamics are too complicated for any tree or lattice approach and closed-form valuation formulae are unavailable. In a practical empirical setting, we weigh the advantages and disadvantages of the simulation approach against competing approaches.
dc.publisherBlackwell Publishing Ltd
dc.sourceAccounting and Finance
dc.subjectKeywords: Interest rate derivatives; Monte-Carlo simulation; Short-term interest rates
dc.titleShort-term interest rate models: valuing interest rate derivatives using a Monte-Carlo approach
dc.typeJournal article
local.description.notesImported from ARIES
local.description.refereedYes
local.identifier.citationvolume43
dc.date.issued2003
local.identifier.absfor150201 - Finance
local.identifier.ariespublicationMigratedxPub4328
local.type.statusPublished Version
local.contributor.affiliationTreepongkaruna, Sirimon, College of Business and Economics, ANU
local.contributor.affiliationGray, Stephen, University of Queensland
local.bibliographicCitation.issue2
local.bibliographicCitation.startpage231
local.bibliographicCitation.lastpage259
local.identifier.doi10.1111/1467-629X.00090
dc.date.updated2015-12-11T08:53:14Z
local.identifier.scopusID2-s2.0-33744949863
CollectionsANU Research Publications

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