Algorithms Behind Term Structure Models of Interest Rates: I. Valuation and Hedging of Interest Rates Derivatives with the Ho-Lee Model

22 Pages Posted: 30 Nov 2001

See all articles by Markus Leippold

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 well known Ho-Lee Model of the term structure of interest rates and describe the algorithm behind this model. After a brief discussion of interest rates and bonds we construct a binomial tree and show how to replicate any fixed income type security. This allows us to value any interest rate contingent claim by means of the replicating portfolio. We also discuss the problem of negative interest rates arising in this model and show how to calibrate the model to an observed set of bond prices.

JEL Classification: G13 C36

Suggested Citation

Leippold, Markus and Wiener, Zvi, Algorithms Behind Term Structure Models of Interest Rates: I. Valuation and Hedging of Interest Rates Derivatives with the Ho-Lee Model (July 1999). Available at SSRN: https://ssrn.com/abstract=292225 or http://dx.doi.org/10.2139/ssrn.292225

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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