| Financial Derivatives Toolbox |
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Overview
Introduction
The Financial Derivatives Toolbox extends the Financial Toolbox in the areas of fixed income derivatives and of securities contingent upon interest rates. The toolbox provides components for analyzing individual financial derivative instruments and portfolios. Specifically, it provides the necessary functions for calculating prices and sensitivities, for hedging, and for visualizing results.
Interest Rate Models
The Financial Derivatives Toolbox computes pricing and sensitivities of interest rate contingent claims based upon:
- The interest rate term structure (sets of zero coupon bonds)
- The Heath-Jarrow-Morton (HJM) model of the interest rate term structure. This model considers a given initial term structure of interest rates and a specification of the volatility of forward rates to build a tree representing the evolution of the interest rates, based upon a statistical process.
- The Black-Derman-Toy (BDT) model for pricing interest rate derivatives. In the BDT model all security prices and rates depend upon the short rate (annualized one-period interest rate). The model uses long rates and their volatilities to construct a tree of possible future short rates. It then determines the value of interest rate sensitive securities from this tree.
For information, see:
| | Background Reading | | Trees | |