Financial Derivatives Toolbox

Using Financial Derivatives

The Financial Derivatives Toolbox provides functions for computing the price and sensitivities of interest rate dependent securities based upon three distinct models for representing interest rates:

• A set of interest rate curves computed from zero coupon bonds. (See the sections Interest Rate Environment and Pricing and Sensitivity from Interest Rate Term Structure.)
• The Heath-Jarrow-Morton interest rate model. (See the sections Heath-Jarrow-Morton (HJM) Model and Pricing and Sensitivity from HJM.)
• The Black-Derman-Toy interest rate model. (See the sections Black-Derman-Toy Model (BDT) and Pricing and Sensitivity from BDT.)

Interest Rate Environment

The interest rate term structure is the representation of the evolution of interest rates through time. In MATLAB, the interest rate environment is encapsulated in a structure called RateSpec (rate specification). This structure holds all information needed to identify completely the evolution of interest rates. Several functions included in the Financial Derivatives Toolbox are dedicated to the creation and management of the RateSpec structure. Many others take this structure as an input argument representing the evolution of interest rates.

Before looking further at the RateSpec structure, examine three functions that provide key functionality for working with interest rates: disc2rate, its opposite, rate2disc, and ratetimes. The first two functions map between discount rates and interest rates. The third function, ratetimes, calculates the effect of term changes on the interest rates.

Portfolio Management

Interest Rates vs. Discount Factors