Binomial Interest Rate Options Pricing
- Similar to the applications of the interest rate tree discussed in fixed income, a variation of the binomial option pricing model as presented can be used for options on bonds and interest rates.
- The analyst will need to:
- Create an interest rate tree of future spot rates.
- Calibrate the interest rate tree so current prices for recently issued bonds are correctly priced.
- Value the underlying bond with the calibrated interest rate tree.
- Apply the decision rule for the option on each tree node; the value of the option at each node will be its intrinsic value.
- Calculate the option's "fair" price by discounting the intrinsic option values through the tree.
- CFA Level 2: Derivatives Part 2 – Introduction
- Introduction to Options
- Synthetic Options and Rationale
- One Period Binomial Option Pricing Model
- Call Option Price Formula
- Binomial Interest Rate Options Pricing
- Black-Scholes-Merton (BSM) Option Pricing Model
- Black-Scholes-Merton Model and the Greeks
- Dynamic Delta Hedging & Gamma Related Issues
- Estimating Volatility for Option Pricing
- Put-Call Parity for Options on Forwards
- Introduction to Swaps
- Plain Vanilla Interest Rate Swap
- Equity Swaps
- Currency Swaps
- Swap Pricing vs. Swap Valuing
- Pricing and Valuing a Plain Vanilla Interest Rate Swap
- Pricing and Valuing Currency Swaps
- Pricing and Valuing Equity Swaps
- Swaps as Theoretical Equivalents of Other Derivatives
- Swaptions and their Valuation
- Swap Credit Risk and Swap Spread
- Interest Rate Derivatives - Caps and Floors
- Credit Default Swaps (CDS)
- Credit Derivative Trading Strategies
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