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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