Interest rate modelling in r


A MULTI INTEREST RATE CURVE MODEL FOR EXPOSURE MODELLING ANDREAS BOLDIN, ROLAND LICHTERS, ANDRE S´ USS AND MARKUS TRAHE¨ Abstract. The tenor basis phenomenon became significant with the 2007 financial crisis and has altered the traditional way of one-curve pricing and risk management to a multi-curve phenomenon. Loan Balance Situation: A person initially borrows an amount A and in return agrees to make n repayments per year, each of an amount P.While the person is repaying the loan, interest is accumulating at an annual percentage rate of r, and this interest is compounded n times a year (along with each payment).Therefore, the person must continue paying these installments of amount P until the ...P = Principal r = interest rate n = number of compounds per year t = number of years this is compounding c = the amount of the contributions made each period a = will be one of two things depending on when contributions are made [if made at the end of the period, a = 1. What if we need to use more than one rate? 1-Factor models (Vasicek, Ho-Lee) Model the short rate, derive the rest of the curve from it. 1-factor not rich enough, how do we add factors? Adding factors not obvious. HJM Forget Black-Scholes.. Model the whole curve. Carlos F. Tolmasky Principal Components Analysis in Yield-Curve Modeling