碩士 / 朝陽科技大學 / 財務金融系碩士班 / 90 / The drawbacks of Ho-Lee model are that interest rate may become negative and the volatility of the short rate is constant. Salmon Brothers model replaces the normal distribution with the lognormal distribution and, as such, interest rate generates by this model will not become negative and causes the volatility of the short rate to be proportional to the level of that rate.
To use the Ho-Lee and Salmon Brothers models, we need the term structure of interest rates. In practice, we have this information. But for our purpose, we use the Ho-Lee Model to generate the term structure of interest rates. That is, using these two no-arbitrage models, we have data on bond maturity and bond yield. Hence, with the information on term structure of interest rates, we can proceed with using Ho-Lee and Salmon Brothers models to construct the risk-neutral tree for the short rate. With the risk-neutral tree, we find the bond prices and then the prices for call and put, either European or American.
In short, although interest rate generates by Ho-Lee model can become negative, if the timing that interest rate become negative is not too early or the lives of the interest rate contingent claims are not too long, the differences between the interest rate contingent claims’ values that get from Ho-Lee and Salmon Brothers models are small. And the shape of the initial term structure decides whether Salmon model is arbitrage-free and to have the model accurately gauge contingent claims prices. When the slope is negative, this model might have to portray future short rate volatilities inaccurately, and these inaccuracies will adversely affect contingent claim pricing.
| Identifer | oai:union.ndltd.org:TW/090CYIT5304012 |
| Date | January 2002 |
| Creators | Po-Sun Wang, 王柏松 |
| Contributors | Yu-pin Hu, Jai-Ming Kung, 胡毓彬, 宮在明 |
| Source Sets | National Digital Library of Theses and Dissertations in Taiwan |
| Language | zh-TW |
| Detected Language | English |
| Type | 學位論文 ; thesis |
| Format | 85 |
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