Equity Derivatives and Structured Products Glossary: Heath-Jarrow-Morton model


en			ru			jp

Home

Knowledge Base

Equity Derivatives and Structured Products Glossary

Heath-Jarrow-Morton model

Back

Heath-Jarrow-Morton model

Heath-Jarrow-Morton model

A multi-factor Interest rate model, which describes the dynamic of Forward rate evolution. An extension of the Ho-Lee model, the Underlying is the entire term structure of Interest rates. The approach is very similar to the original Black-Scholes model: it does not model qualities such as the ‘price for Risk’. The model requires two inputs: the initial Yield curve and a Volatility structure for the Forward. The Volatility is only specified in a very general form. By choosing an appropriate Volatility function, it is possible to reduce HJM to simpler models such as Ho-Lee, Vasicek, and Cox-Ingersoll-Ross. The practical importance of the HJM model is that it provides a single coherent framework for pricing and Hedging an entire book of instruments (including instruments such as caps and swaptions) and is not excessively computationally intensive. Research building on HJM (such as the market model) has concentrated on widening its scope to remove the possibility of negative Interest rates, include more than one Interest rate curve and incorporate Default Risk.

Posted by Privatebanking.com

Back

Privatebanking.com

Get the attention you always wanted and promote your corporate image and standing by benefiting from our state of the art interactive web presence.

Ascent Limited

Experience The Difference. Ascent Limited provides first class wealth management and family office services. Our private banking team, assembled from a group of highly experienced banking professionals, will provide financial advice tailored to your individual requirements and keep your portfolio in tune with the latest market developments and opportunities.

©	Copyright by PRIVATE BANKING.COM 2002- - All rights reserved.