O'Reilly logo

Introduction to Option-Adjusted Spread Analysis: Revised and Expanded Third Edition of the OAS Classic by Tom Windas by Tom Miller

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 7
VOLATILITY AND THE BINOMIAL TREE
IN CHAPTER 5, a set of risk-free interest rates for a sequence of future semiannual periods were derived from the observed yields of benchmark bonds that make up the risk-free yield curve. Each implied forward rate quantifies the risk-free rate of return for the six-month period with which it is associated and forms the framework on which the binomial interest-rate tree is built. These implied forward rates, along with their associated periods, are shown in FIGURE 7.1.
If option models were simply to use implied forward rates to generate a price for an option’s underlying bond on a future date, their analyses would implicitly assume that interest rates implied by today’s market for future periods would ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required