Single-Period Binomial Heath–Jarrow–Morton Model

Robert Jarrow () and Arkadev Chatterjea

Chapter 23 in An Introduction to Derivative Securities, Financial Markets, and Risk Management, 2024, pp 554-587 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The following sections are included:IntroductionThe Basic Interest Rate DerivativesUses of Caps, Floors, and CollarsA Brief History of Interest Rate Derivatives ModelsThe AssumptionsThe Single-Period ModelArbitrage-Free EvolutionsZero-Coupon Bond Prices and MartingalesUnderstanding the Equal Pseudo-probability ConditionActual versus Pseudo-probabilitiesCaplet PricingThe Hedge Ratio (the Holy Grail)Risk-Neutral ValuationValuing a FloorletValuing Various Interest Rate DerivativesMultiple FactorsSummaryAppendixThe Equal Pseudo-probability ConditionProof of Caplet and Floorlet ParityCasesQuestions and Problems

Keywords: Derivatives; Financial Markets; Risk Management; Arbitrage; Financial Engineering; Forwards; Futures; Call Options; Put Options; European Options; American Options; Swaps; Currency Swaps; Interest Rate Swaps; Commodity Swaps; Equity Swaps; Credit Default Swaps; Commodity Derivatives; Equity Derivatives; Index Derivatives; Interest Rate Derivatives; Commodities; Margins and Daily Settlements; Binomial Model; Black-Scholes Model; Black-Scholes-Merton Model; Delta Hedging; Gamma Hedging; Heath-Jarrow-Morton Model; Libor Model; Forward Rate Agreements; Interest Rate Futures; Interest Rate Options; Market Manipulation; Regulation; Derivatives Exchanges (search for similar items in EconPapers)
JEL-codes: C58 G1 G10 G13 G2 G20 G32 (search for similar items in EconPapers)
Date: 2024
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