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The Zero-Coupon Rate Model for Derivatives Pricing

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  • Xiao Lin

Abstract

The aim of this paper is to present a dual-term structure model of interest rate derivatives in order to solve the two hardest problems in financial modeling: the exact volatility calibration of the entire swaption matrix, and the calculation of bucket vegas for structured products. The model takes a series of long-term zero-coupon rates as basic state variables that are driven directly by one or more Brownian motion. The model volatility is assigned in a matrix form with two terms. A numerical scheme for implementing the model has been developed in the paper. At the end, several examples have been given for the model calibration, the structured products pricing and the calculation of bucket vegas.

Suggested Citation

  • Xiao Lin, 2016. "The Zero-Coupon Rate Model for Derivatives Pricing," Papers 1606.01343, arXiv.org, revised Feb 2022.
    • Handle: RePEc:arx:papers:1606.01343
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    References listed on IDEAS

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