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