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Chapter 8: Binomial Interest Rate Tree Models

In this section

  • Building and Calibrating the Tree
    Learn how to construct a binomial interest rate tree, select appropriate parameters, and calibrate it so that modeled rates match real-world yield curves and volatility assumptions in an arbitrage-free framework.
  • Backward Induction Valuation Process
    A thorough guide on using backward induction in binomial interest rate trees, detailing step-by-step valuation of fixed income instruments and embedded option securities.
  • Forward Probabilities and Risk-Neutral Approach
    Explore the essential role of risk-neutral probabilities and forward measures in binomial interest rate tree valuation. Learn how these probabilities differ from real-world measures, ensure arbitrage-free pricing, and facilitate forward rate calibration.
  • Sample Item Set: Tree-Based Pricing for Coupon Bonds
    Learn how to price coupon bonds using a binomial interest rate tree, apply backward induction, and understand embedded option valuation in a practical item set format.
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Chapter 7: Arbitrage-Free Valuation Framework
Chapter 9: Monte Carlo Simulation for Fixed Income