Interest Rate Processes

Model Overview
The term structure model is an integral component of any option-adjusted valuation. The arbitrage-free generation of future interest rates derived from market-based volatilities provides a solid foundation to assess the values of embedded options for MBS and ABS. We offer a selection of term structure models that include the single-factor Hull-White, Black-Karasinski or Squared-Gaussian models, and a two-factor Gaussian model.

Model Inputs
Trade (valuation) date with available benchmark yield curve (Treasury or Swap rates, coupon-bearing or zeros) and a set of ATM swaption volatilities. The model is equipped with "instant" calibration engine. Alternatively, volatility and mean reversion can be user-defined. The two-factor model requires entering two correlations between the short rate and two user-defined long rates.

Model Outputs
Lattice: For any single-factor model, an arbitrage-free lattice with market nodes (short rate plus three long, user-defined, rates) and transitional probabilities.
Simulations: A mathematically consistent set of random or quasi-random arbitrage free short (1 month) rate and up to three long, user-defined, rates.
Other rates: Can be generated by repeated calls.
Other functionality: The Model is equipped with backward inducting derivative pricing functions covering any-exercise-style embedded option bonds, swaptions and caps.

Model Documentation
Interest Rate Modeling: A Conscientious Choice
A Lattice Implementation of the Black-Karasinski Interest Rate Process

Platforms Supported:
Subroutines: Windows
Shared Objects: Solaris, HP and Linux
Excel for calibration results

Vendor Partners: The following systems, which seamlessly incorporate the output into broader analytical solutions, have fully integrated the Model: Algorithmics, BearMeasurisk, Murex, Reuters, Summit Systems and various firms' proprietary systems.