Search results
Results from the WOW.Com Content Network
The risk-free rate is also a required input in financial calculations, such as the Black–Scholes formula for pricing stock options and the Sharpe ratio. Note that some finance and economic theories assume that market participants can borrow at the risk-free rate; in practice, very few (if any) borrowers have access to finance at the risk free ...
Short rate models are often classified as endogenous and exogenous. Endogenous short rate models are short rate models where the term structure of interest rates, or of zero-coupon bond prices (,), is an output of the model, so it is "inside the model" (endogenous) and is determined by the model parameters. Exogenous short rate models are ...
The British pound yield curve on February 9, 2005. This curve is unusual (inverted) in that long-term rates are lower than short-term ones. Yield curves are usually upward sloping asymptotically: the longer the maturity, the higher the yield, with diminishing marginal increases (that is, as one moves to the right, the curve flattens out).
Risk-free rate: The rate of return on the riskless asset is constant and thus called the risk-free interest rate. Random walk: The instantaneous log return of the stock price is an infinitesimal random walk with drift; more precisely, the stock price follows a geometric Brownian motion , and it is assumed that the drift and volatility of the ...
An affine term structure model is a financial model that relates zero-coupon bond prices (i.e. the discount curve) to a spot rate model. It is particularly useful for deriving the yield curve – the process of determining spot rate model inputs from observable bond market data.
John Hull and Alan White, "Numerical procedures for implementing term structure models II," Journal of Derivatives, Winter 1994, pp. 37–48. John Hull and Alan White, "The pricing of options on interest rate caps and floors using the Hull–White model" in Advanced Strategies in Financial Risk Management, Chapter 4, pp. 59–67.
A basic interest rate pricing model for an asset is = + + + where i n is the nominal interest rate on a given investment i r is the risk-free return to capital i* n is the nominal interest rate on a short-term risk-free liquid bond (such as U.S. treasury bills).
Similarly, interest rates do not usually decrease much below 0. As a result, interest rates move in a limited range, showing a tendency to revert to a long run value. The drift factor () represents the expected instantaneous change in the interest rate at time t. The parameter b represents the long-run equilibrium value towards which the ...