A PDE based implementation of the Hull\,\&\,White model for cash flow derivatives (Q1424651)
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| Language | Label | Description | Also known as |
|---|---|---|---|
| English | A PDE based implementation of the Hull\,\&\,White model for cash flow derivatives |
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A PDE based implementation of the Hull\,\&\,White model for cash flow derivatives (English)
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16 March 2004
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A geometric approach to the Hull\,\&\,White short interest rate model is considered. An invariant manifold for the dynamics of forward zero coupon bond prices is constructed. It allows to reduce the Bermudian option pricing problem to the solution of a series of end-value problems for a backward heat equation. These problems are solved numerically by the Crank-Nicolson scheme. For European cashflow derivatives this leads to a semi-explicit pricing formula. Results of simulations are presented.
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geometric approach
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invariant manifold
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Bermudian option
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backward heat equation
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