Valuation of Interest Rate Instruments

This technical paper outlines various methodologies for the valuation of interest rate instruments within the UnRısk framework.

It begins with a detailed discussion of the one-factor interest rate model, explaining the adaptive integration algorithm used to price callable and putable fixed rate bonds. The paper then expands to more complex models, including the Hull & White two-factor model, where finite element methods with streamline diffusion are applied. Additionally, the paper covers the valuation of instruments under a LIBOR market model using Monte Carlo simulations, detailing the steps involved in time and space discretization, volatility and correlation calculation, and Monte Carlo valuation.

These advanced methodologies ensure accurate and efficient pricing of a wide range of interest rate products, accommodating the complexities of real-world financial markets.