401-3953-00L  Interest Rate Modeling in Discrete Time

SemesterAutumn Semester 2013
LecturersM. V. Wüthrich
Periodicitytwo-yearly course
Language of instructionEnglish

AbstractThis course gives an introduction to stochastic interest rate modeling in discrete time. Starting from cash flow valuation with state price deflators, we derive the equivalent martingale measures for pricing financial instruments and derivatives of primary assets. The lecture is supplemented by several examples such as the Vasicek model where we also study model calibration.
ObjectiveThe students are familiar with the basic terminology of stochastic interest rate modeling and he is able to transfer his (financial) mathematical knowledge to real world pricing of cash flows and financial instruments.
ContentThe following topics are covered:
1) stochastic discounting with state price deflators
2) equivalent martingale measures
3) pricing of cash flows and primary assets
4) pricing of derivatives, e.g. European put options
5) (multi-factor) Vasicek state price deflator model
6) Heath-Jarrow-Morton interest rate modeling framework
Lecture notesPart I of:
Wüthrich, M.V., Merz, M. (2013). Financial Modeling, Actuarial Valuation and Solvency in Insurance. Springer.
LiteratureFor further reading:
Brigo, D., Mercurio, F. (2006). Interest Rate Models - Theory and Practice. 2nd Edition, Springer.
Filipovic, D. (2009). Term-Structure Models. A Graduate Course. Springer.
Prerequisites / NoticeThe exams ONLY take place during the official ETH examination period.

Prerequisites: knowledge of probability theory and applied stochastic processes.