Course title: Yield curve models (Modèle de taux) Teacher: E. Koehler
UE 2
Major(s): FQ
18 hours (2.5 ECTS) Evaluation: Written exam
Presentation:
During the course “Introduction to Finance “, we will have seen how to value investment whit deterministic cash flows. However, there are a lot of cases where the cash flows are unknown at the time of valuation.
This led the financial industry to look for modeling allowing for the determination of future (and stochastic) discount factors.
The Interest rate risk is also a very material component in both Market Risk (for example, of the Credit Valuation Adjustment) and Counterparty Risk that have a big impact on the Capital of the Banks.
We’ll start with the risk neutral probabilities in a multi-currency modeling framework. We’ll continue with the definition of forward neutral and swap neutral probabilities to price caps and floors or swaptions.
We’ll see how the industry came to the notion of yield curve modeling and the models that were historically developed and still commonly in use, as for example, the following models:
• Vasicek and Cox Ingersoll Ross models
• Hull and White models
• Heath Jarrow Morton (“HJM”) model
• Brace Gatarek Musiela (“BGM”) and the Libor Market (LMM) models
We’ll also talk about calibration and how to calibrate some of the models already mentioned.
UE 2
Major(s): FQ
18 hours (2.5 ECTS) Evaluation: Written exam
Presentation:
During the course “Introduction to Finance “, we will have seen how to value investment whit deterministic cash flows. However, there are a lot of cases where the cash flows are unknown at the time of valuation.
This led the financial industry to look for modeling allowing for the determination of future (and stochastic) discount factors.
The Interest rate risk is also a very material component in both Market Risk (for example, of the Credit Valuation Adjustment) and Counterparty Risk that have a big impact on the Capital of the Banks.
We’ll start with the risk neutral probabilities in a multi-currency modeling framework. We’ll continue with the definition of forward neutral and swap neutral probabilities to price caps and floors or swaptions.
We’ll see how the industry came to the notion of yield curve modeling and the models that were historically developed and still commonly in use, as for example, the following models:
• Vasicek and Cox Ingersoll Ross models
• Hull and White models
• Heath Jarrow Morton (“HJM”) model
• Brace Gatarek Musiela (“BGM”) and the Libor Market (LMM) models
We’ll also talk about calibration and how to calibrate some of the models already mentioned.
