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In the above formulae: is the length of time per step in the tree and is simply time to maturity divided by the number of time steps; is the risk-free interest rate over this maturity; is the corresponding volatility of the underlying; is its corresponding dividend yield.
The effective interest rate (EIR), effective annual interest rate, annual equivalent rate (AER) or simply effective rate is the percentage of interest on a loan or financial product if compound interest accumulates in periods different than a year. [1] It is the compound interest payable annually in arrears, based on the nominal interest rate ...
The yield to maturity (YTM), book yield or redemption yield of a fixed-interest security is an estimate of the total rate of return anticipated to be earned by an investor who buys it at a given market price, holds it to maturity, and receives all interest payments and the capital redemption on schedule. [1] [2]
Interest rate during commercial operation, % A project finance model is a specialized financial model , the purpose of which is to assess the economic feasibility of the project in question. The model's output can also be used in structuring, or "sculpting", the project finance deal.
John Hull and Alan White, "One factor interest rate models and the valuation of interest rate derivative securities," Journal of Financial and Quantitative Analysis, Vol 28, No 2, (June 1993) pp. 235–254. John Hull and Alan White, "Pricing interest-rate derivative securities", The Review of Financial Studies, Vol 3, No. 4 (1990) pp. 573–592.
Given this functional link to volatility, note now the resultant difference in the construction relative to equity implied trees: for interest rates, the volatility is known for each time-step, and the node-values (i.e. interest rates) must be solved for specified risk neutral probabilities; for equity, on the other hand, a single volatility ...
The Black model (sometimes known as the Black-76 model) is a variant of the Black–Scholes option pricing model. Its primary applications are for pricing options on future contracts, bond options, interest rate cap and floors, and swaptions.
b = the long-run mean to which the interest rate reverts; the expected interest rate in the long run; a = the speed of reversion of the interest rate to its long-run mean (e.g., a = 2 means the interest is expected to return to its long-term mean within half a year, and a = 1/5 means it would take 5 years).