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Algorithms behind Term Structure Models of Interest Rates II: The Hull-White Trinomial Tree of Interest Rates

Hebrew University Working Paper No. int071899

17 Pages Posted: 30 Nov 2001  

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Date Written: July 1999

Abstract

In this article we implement the trinomial tree of the Hull-White model, which can be easily extended to allow different assumptions about the dynamics of the short rate process. We present the Mathematical algorithm for the extended Vasicek and the Black-Karasinski model. Whenever negative interest rates are generated with a positive probability, we make use of alternative branching processes, which guarantee the positivity of interest rates. Finally we show how to price simple options such as caplets, and compare the convergence of trinomial trees with different geometries.

JEL Classification: G13 C36

Suggested Citation

Leippold, Markus and Wiener, Zvi, Algorithms behind Term Structure Models of Interest Rates II: The Hull-White Trinomial Tree of Interest Rates (July 1999). Hebrew University Working Paper No. int071899. Available at SSRN: https://ssrn.com/abstract=292223 or http://dx.doi.org/10.2139/ssrn.292223

Markus Leippold

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Zvi Wiener (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

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