Yield to maturity modelling and a Monte Carlo Technique for pricing Derivatives on Constant Maturity Treasury (CMT) and Derivatives on forward Bonds

Didier Kouokap Youmbi

Papers from arXiv.org

Abstract: This paper proposes a Monte Carlo technique for pricing the forward yield to maturity, when the volatility of the zero-coupon bond is known. We make the assumption of deterministic default intensity (Hazard Rate Function). We make no assumption on the volatility of the yield. We actually calculate the initial value of the forward yield, we calculate the volatility of the yield, and we write the diffusion of the yield. As direct application we price options on Constant Maturity Treasury (CMT) in the Hull and White Model for the short interest rate. Tests results with Caps and Floors on 10 years constant maturity treasury (CMT10) are satisfactory. This work can also be used for pricing options on bonds or forward bonds.

Date: 2012-04
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1204.4631 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1204.4631

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().