hellmaster

03-29-2008, 08:02 PM

Hi, Guys,

I have a question about arbitrage interest rate model and am hoping to get some help from some of our experts here. :-)

For arbitrage interest rate model, it is mentioned in the V-C125-07 that the entire yield curve is assumed to move randomly (compared to equilibrium model). But in the numerical examples, I only see them modeling one year spot rate using interest lattice. I am thinking in order to model the yield curve probably, shouldn't construct one interest lattice for each spot rate with a particular term. However, this will lead to constructing infinite amount of interest lattices as there are infinite amount of spot rates with different terms embedded in a yield curve.

Or are they assuming modeling one year term spot rate will somehow be the same as modeling the whole yield curve?

Many thanks in advance.

I have a question about arbitrage interest rate model and am hoping to get some help from some of our experts here. :-)

For arbitrage interest rate model, it is mentioned in the V-C125-07 that the entire yield curve is assumed to move randomly (compared to equilibrium model). But in the numerical examples, I only see them modeling one year spot rate using interest lattice. I am thinking in order to model the yield curve probably, shouldn't construct one interest lattice for each spot rate with a particular term. However, this will lead to constructing infinite amount of interest lattices as there are infinite amount of spot rates with different terms embedded in a yield curve.

Or are they assuming modeling one year term spot rate will somehow be the same as modeling the whole yield curve?

Many thanks in advance.