The Black Model for Interest Rate Derivatives

The Black Model for Interest Rate Derivatives Essay example
Masters
Essay
Finance & Accounting
Pages 6 (1506 words)
Download 0
The Black Model for Interest Rate Derivatives Name Course Institution Date Table of Contents Introduction 2 Overview and Development of Black Model 2 Applications of Black Model in pricing European Options 4 Validity of Black Model 5 Other Applications of Black Model 6 Conclusion 7 Bibliography 8 Introduction The following is a discussion and evaluation of the Black Model for interest rate derivates…

Introduction

Over the last two and half decades, finance has experienced tremendous and exciting developments especially with reference to derivatives markets. One of the reasons explaining the idea of tremendous and exciting developments within financial sector is the fact that both hedger and speculators within financial markets find it attractive to trade derivate specifically assets rather than trading on the assets themselves (Gupta and Subrahmanyam. 2005). Development of derivatives is considered as one of the most successful upcoming within capital markets (Brigo and Mercurio 2001). Within derivatives, there are three main traders; hedger, speculators, and arbitrageurs. Application of derivatives within financial markets helps in eliminating or reducing risk associated with the fluctuations in the prices of assets. Overview and Development of Black Model Financial markets have experienced an increase in the interest-rate contingent claims that include amongst others caps, swaptions, bond options, mortgage-backed securities, as well as captions. The main problem however that is currently experienced is the development of effective and efficient instruments for valuing such contingent claims. Different models have been developed and used in an attempt to find the best and most effective one. ...
Download paper
Not exactly what you need?

Related papers

Finance and Accounting Essay: the effects of interest rate volatilities on the demand of Turkish money
This theory of the effect of interest rate volatility on Turkish money demand can be established only through the Garch model. This theory needs to be established using the E-view software by using the Garch model. Introduction: The main aim of this study is to understand the effect of interest rate volatility on the Turkish money demand. Interest rate volatility is a very important factor in…
16 pages (4016 words)
Risk Measurement and Management: interest rate, liquidity and operational risk
It affects the value of bonds directly as compared to stocks thus a major risk to all bond holders. The increase in interest rate reduces the bond prices while their decrease inflates the bond prices. Therefore, as interest rate increase, the cost of holding a bond reduces because investor are able to recognize grater yields by opting to other investments that result into high interest…
12 pages (3012 words)
On the Numerical Solution of Black-Scholes Equation
An option is a financial instrument that gives an individual the right to buy or sell an asset, at some time in the future. Options are traded on a number of exchanges throughout the world, the first of which was the Chicago Board Options Exchange (CBOE), which started in 1971.The price V(S,t) of the derivative or the option depends on the price of the underlying S and time t. V(S,t) satisfies the…
3 pages (753 words)
Interest Rate SWAPS
According to Pelsser (2000) the market related to derivative securities has been stated to be perceived similar to an insurance market in relation to the considered financial risks. The rapid rate of globalisation in terms of the capital markets has resulted in a significant rise in the level of volatility related to interest rate across the globe. Numerous companies displayed a preference in…
8 pages (2008 words)
Interest rate convergence / Covered or uncovered interest rate parity
made significant losses on acquisitions of foreign institutions and on holding of asset-based securities (OECD, 2009, p.30). By mid 2007, the financial disorder with its rigorous liquidity and credit crunch seemed to detain to financial markets and institutions in the U.S., U.K., Western Europe, Asia and many other countries. It resulted in the failure of key businesses, downturn in the economic…
13 pages (3263 words)
the effects of interest rate liberalization to the risk of commercial banks in china
Under such method levying of extra charges of loan is not allowed. Researchers say during 1974-1978 Development Plans, the government of different countries felt the need to review the interest rate in order to encourage the savings through the bank and to create disincentive to eradicate the speculation and uneconomic use of savings by the borrowers. During 1980 the interest rate policy was used…
20 pages (5020 words)
The Effect of interest rate Liberalization on the risk of commercial banks in China
The paper has discussed illustrates a mixed picture after interest rate liberalization and its associated risk on the commercial banks in China. Historically China is a strong believer in the planned economy where strict government intervention under a single party rule always has the last word regarding the policies to be prioritized and implemented. Though after the iron rule of Mao-era China…
60 pages (15060 words)