Ho–Lee model
Appearance
In
interest rate derivatives, and in modeling future interest rates.[1]: 381 It was developed in 1986 by Thomas Ho[2] and Sang Bin Lee.[3]
Under this model, the short rate follows a
normal process
:
The model can be calibrated to market data by implying the form of from market prices, meaning that it can exactly return the price of bonds comprising the yield curve. This calibration, and subsequent valuation of bond options, swaptions and other interest rate derivatives, is typically performed via a binomial lattice based model. Closed form valuations of bonds, and "Black-like" bond option formulae are also available.[4]
As the model generates a symmetric ("bell shaped") distribution of rates in the future, negative rates are possible. Further, it does not incorporate
lognormal
analogue to the Ho–Lee model, although is less widely used than the latter two.
References
Notes
- ^ ISBN 0-470-10910-6
- ^ Thomas S.Y. Ho Ph.D, thcdecisions.com
- ^ Sang Bin Lee, shanghai.nyu.edu
- ^ Graeme West, (2010). Interest Rate Derivatives Archived 2012-04-17 at the Wayback Machine, Financial Modelling Agency.
Primary references
- T.S.Y. Ho, S.B. Lee, Term structure movements and pricing interest rate contingent claims, doi:10.2307/2328161
- John C. Hull, Options, futures, and other derivatives, 5th edition, ISBN 0-13-009056-5
External links
- Valuation and Hedging of Interest Rates Derivatives with the Ho-Lee Model, Markus Leippold and Zvi Wiener, Wharton School
- Term Structure Lattice Models, Martin Haugh, Columbia University
Online tools
- Binomial Tree – Excel implementation, thomasho.com