Interest rates, short rate algorithms
We implemented short rate models to price complex derivatives, that are highly sensitive to interest rate changes.
Baseline
Treasury tools do not offer sufficient support for derivative pricing when underlyings highly depend on interest rate
Customers need models to simulate changes in interest rate and find fair prices for certain hedging instruments
Approach
Stochastic short rate models based on mean reversion hypothesis with parametrized stochastic differential equations
One-factor and two-factor models
Hull-White and Black-Karasinski short rate trees to fully adapt to market situations
Fast calibration based on caps and floors observable in the market
Pricing algorithms with binomial trees for low dimensional data and (Quasi-)Monte Carlo algorithms for basket options
Callable bonds
Bermudan swaptions
Benefit
Full short rate evolution scenarios are simulated
Multiple derivative prices are calculated in milliseconds
The model can be calibrated to historical data in minutes
Fast implementation in parallelized C++
Integrated in REVAL’s treasury software solution used by international corporates and banks
