O'Reilly logo

Mastering R for Quantitative Finance by Edina Berlinger, Ferenc Illés, Milán Badics, Ádám Banai, Gergely Daróczi, Barbara Dömötör, Gergely Gabler, Dániel Havran, Péter Juhász, István Margitai, Balázs Márkus, Péter Medvegyev, Julia Molnár, Balázs Árpád Szűcs, Ágnes Tuza, Tamás Vadász, Kata Váradi, Ágnes Vidovics-Dancs

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 6. Interest Rate Derivatives and Models

Interest rate derivatives are financial derivative products whose payoff is dependent on the interest rates.

There is a wide range of such products; the basic types include interest rate swaps, forward rate agreements, callable and puttable bonds, bond options, caps and floors, and so on.

In this chapter, we will start with the Black model (also referred to as the Black-76 model), which is a generalized version of the Black-Scholes model, and is often used to price interest rate derivatives. Then, we will show how to apply the Black model to price an interest rate cap.

A shortcoming of the Black model is that it assumes lognormal distribution for some underlying asset (for example, bond price or interest ...

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