ACTSC445 Lecture Notes - Vasicek Model, Callable Bond, Arbitrage

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Department of statistics and actuarial science, university of waterloo. Unit 8 (part i) discrete-time interest rate models. 7 of financial economics, chapter 37 of fabozzi. In this unit, we will discuss term structure models, i. e. , models for the evolution of the term structure of interest rates. Such models can be used to price xed income securities (such as callable bonds), and interest-rate derivatives (such as interest caps and oors). Most of the models we will look at in part i are discrete-time, single-factor, no-arbitrage models Alternative is equilibrium model, in which economic agents determine, through their behavior/preferences, equilibrium prices (e. g. , cox- = short rate at time t (random variable), t = 0, . , t 1. it i(t, n) = nth possible value that it can take, n = 0, . In other words, we will be modeling the process i0, .

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