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The Black Model for Interest Rate Derivatives - Essay Example

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Summary

The Black Model for Interest Rate Derivatives 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…

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The Black Model for Interest Rate Derivatives

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. ...
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