Chapter 9: Monte Carlo Simulation for Fixed Income

In this section

• Forward-Rate Simulation Techniques
  Explore advanced forward-rate simulation methods in fixed income, focusing on modeling interest rate evolution using Monte Carlo. Learn how to structure stochastic processes, calibrate parameters, and generate paths for bond pricing, especially in the Heath-Jarrow-Morton framework.
• Advantages vs. Binomial Trees
  Discover why Monte Carlo simulation often outperforms binomial tree models in fixed income analysis, including greater modeling flexibility, scalability for high-dimensional problems, and richer statistical outputs.
• Capturing Path-Dependency in Cash Flows
  Explore how Monte Carlo simulation handles path-dependent cash flows in fixed-income instruments, with examples of prepayment modeling, embedded option triggers, and reinvestment assumptions.
• Vignette: Sensitivity to Volatility in Simulations
  Explore how changing volatility assumptions in Monte Carlo simulations impacts bond and derivative valuations in fixed income portfolios.