Valuation of Path-Dependent Interest Rate Derivatives in a Finite Difference Setup
Mikkel Svenstrup ()
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Mikkel Svenstrup: Department of Finance, Aarhus School of Business, Postal: Fuglesangs Allé 4, 8210 Aarhus V, Denmark, http://www.asb.dk/EOK/FIN/STAFF/MSV_FORM.HTM
No 02-21, Finance Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies
Abstract:
In this paper we study and implement a finite difference version of the augmented
state variable approach proposed by Hull & White (1993) that allows for pathdependent
securities. We apply the method to a class of path-dependent interest
rate derivatives and consider several examples including mortgage backed securities
and collateralized mortgage obligations. The efficiency of the method is assessed in
a comparative study with Monte Carlo simulation and we find it to be faster for a
similar accuracy.
Keywords: Path-dependent Options; Finite Difference; Mortgage Backed Securities (search for similar items in EconPapers)
Pages: 20 pages
Date: 2003-05-09
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Persistent link: https://EconPapers.repec.org/RePEc:hhb:aarfin:2002_021
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