The Valuation and Risk Management of Interest Rate Derivatives-- Take Hull-White Model for Example

Abstract:
The thesis tries to edit the advantages and disadvantages of the interest rate models. The reasons why I choose the Hull-White Model are easy to compute the parameters, to save computing time, and to calculate accurate prices of exotic derivatives. It does not spend much time like Monte Carlo Simulation and can not get the close form solution directly like Partial Differential Equation.

The thesis focuses on the calibration of Hull-White model parameters. We can get the real market prices from quoted volatilities in the market. We can also get the model prices from analytical form solution or interest rate trinomial tree model. Then, to narrow the difference between the market price and model price as possible can let the model fit the real situation. After learning the skills to calibrate the parameters, I can use Hull-White model to manage interest rate risk. It can transform the long and short positions to the same hedging bases. So we can hedge the whole portfolio not individual derivative to save huge hedging cost.