Hi David and others,
I am currently going to value a swap and I am following the "bond" method from Hull 2012.
From this method we are not using the forward rates, due the concept of floating rate been equal to notional at the payment dates. So basically what we need is the discount factors, right?
In order to obtain the discount curve, we can use the Euribor rates (as short rates), Futures rates (as medium rates) and moreover swap rates (long term rates).
When we obtain the discount curve, we can simply use interpolation (spline or interpolation) to the get value in between.
When due we interest rate models?
-> Interest rate models, ex. Ho-Lee, can be set to the initial term structure, but why and when should we use the interest rate model?
(The Vasicek model ex, will worsen the pricing of the swap, because it doesn't fit the actual term structure) - However, the Hull white, has a possible to capture the volatility caps as well, as the initial term structure?
What is the correct way?
Do we just find the discount factors, interpolate for unknown maturities, and prices the swap.
No forward rates are needed when using the bond method and no need for interest rate models?
I am currently going to value a swap and I am following the "bond" method from Hull 2012.
From this method we are not using the forward rates, due the concept of floating rate been equal to notional at the payment dates. So basically what we need is the discount factors, right?
In order to obtain the discount curve, we can use the Euribor rates (as short rates), Futures rates (as medium rates) and moreover swap rates (long term rates).
When we obtain the discount curve, we can simply use interpolation (spline or interpolation) to the get value in between.
When due we interest rate models?
-> Interest rate models, ex. Ho-Lee, can be set to the initial term structure, but why and when should we use the interest rate model?
(The Vasicek model ex, will worsen the pricing of the swap, because it doesn't fit the actual term structure) - However, the Hull white, has a possible to capture the volatility caps as well, as the initial term structure?
What is the correct way?
Do we just find the discount factors, interpolate for unknown maturities, and prices the swap.
No forward rates are needed when using the bond method and no need for interest rate models?
