Modelling Fixed Income Securities and Interest Rate Options

Author: Robert A. Jarrow

About the Book
This book provides an introduction to fixed-income securities and interest rate options. The focus of this book is on Risk Management, i.e. the pricing and hedging of fixed-income securities and interest rate options. This is in contrast to the focus of traditional books in this area. Traditional textbooks study the institutional setting of these markets. This book provides a self-contained study of a new approach for pricing and hedging fixed-income securities and interest rate options. The new approach utilizes option pricing theory and was developed in a sequence of papers by Heath, Jarrow and Morton.

This textbook also explains the arbitrage-free term structure models used for pricing interest rate derivatives with particular emphasis on the Heath-Jarrow-Morton model and its applications.

The textbook is integrated with computer software both to facilitate the student's understanding and to familiarize the student with the types of professional software used "on the street."

Book Contents
The book is divided into two parts. Part I is the textbook and part II describes the computer software. Part I contains fifteen chapters.

  • Chapter 1 - Introduction
  • Chapter 2 - Brief description of actually traded fixed-income securities and interest-rate options studied in this text.
  • Chapter 3 - Introduction to the notation, terminology, and assumptions used in the text.
  • Chapter 4 - Introduction to the stochastic evolution for the zero-coupon bond curve using one-factor and multiple-factor models.
  • Chapter 5 - Abstract analysis of trading strategies, arbitrage opportunities, and market completeness.
  • Chapter 6 - Application of material of Chapters 1-5 to the pricing of zero-coupon bonds.
  • Chapter 7 - Discussion of option pricing theory in the context of the term structure of interest rates.
  • Chapter 8 - Pricing of coupon bonds and options
  • Chapter 9 - Pricing and hedging of forwards, futures, and options or futures.
  • Chapter 10 - Analysis of swaps, caps, floors, and swaptions
  • Chapter 11 - Pricing of various interest rate exotic options
  • Chapter 12 - Study of Continuous-time limit of the discrete time model
  • Chapter 13 - Estimating the parameters needed as inputs for the previous model
  • Chapter 14 - Discussion of the class of spot rate models
  • Chapter 15 - Discussion of various extensions