Scandinavian Working Papers in Business Administration
Finance Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies
No 02-21: Valuation of Path-Dependent Interest Rate Derivatives in a Finite Difference Setup
Mikkel Svenstrup ()
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Mikkel Svenstrup: Department of Finance, Aarhus School of Business, Postal: Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Abstract: In this paper we study and implement a finite difference version of the augmented
state variable approach proposed by Hull & White (1993) that allows for pathdependent
securities. We apply the method to a class of path-dependent interest
rate derivatives and consider several examples including mortgage backed securities
and collateralized mortgage obligations. The efficiency of the method is assessed in
a comparative study with Monte Carlo simulation and we find it to be faster for a
similar accuracy.
Keywords: Path-dependent Options; Finite Difference; Mortgage Backed Securities
20 pages, May 9, 2003
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