Abstract
There exist two classes of interest rate models. Short rate (HW, CIR, BDT), easy in pricing and tough in and forward rate (HJM, BGM), easy in and tough in pricing. Parameters in short rate have no natural interpretation in terms of market volatility but many options can be priced on recombining trees. We find particularly inconvenient the procedure of fitting the initial yield curve - necessary for many short rate models. Parameters of forward rate (especially BGM) have direct link to market volatility but there exists a common prejudice that recombining trees cannot be applied to forward rate models. This paper is an attempt to construct a model allowing both recombining trees and calibration without programming. We would like to call both presented simplest possible term structure models - at least we do not know any simpler model.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
