Mastering Python for Finance - Second Edition

Other considerations in callable bond pricing

In pricing callable zero-coupon bonds, we used the Vasicek interest-rate process to model interest-rate movement with the aid of a normal distribution process. In The Vasicek model section, we demonstrated that the Vasicek model can produce negative interest rates, which may not be practical for most economic cycles. Quantitative analysts often use more than one model in derivative pricing to obtain realistic results. The CIR and Hull-White models are some of the commonly-discussed models in financial studies. The limitation on these models is that they involve only one factor, or a single source of uncertainty.

We also looked at the implicit scheme of finite differences for the policy iteration ...