22 Pages Posted: 30 Nov 2001
Date Written: July 1999
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: 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