Deck 19: No Arbitrage Models and Standard Derivatives

Question 1

What happens to the term structure of volatility in the Hull-White model?

Answer 1

Under the Hull-White model we can also match the term structure of spot-rate volatility.

Question 2

What is the main drawback for log-normal models such as Black-Derman- Toy and Black-Karasinsky?

Answer 2

The main drawback of these models is that they do not allow analytical solutions as some of theri Normal counterparts.

Question 3

How are Black-Derman-Toy and Black-Karasinsky related?

Answer 3

Black-Derman-Toy is a special case of Black-Karasinsky.

Question 4

Can you engage on Relative Value Trades on zero coupons obtained from the Ho-Lee model? Explain.

Question 5

Why are values obtained from the Ho-Lee model generally higher than does obtained from the Vasicek model?

Question 6

Under the Ho-Lee model how does the volatility of long term bonds com- pare to short term bonds?

Question 7

What are the drawbacks of the Ho-Lee model?

Question 8

Why are Hull-White prices for call options different from the prices ob- tained in the Vasicek model?

Question 9

What are the main drawback of Normal models?

Question 10

Why are Hull-White prices for call options different from the prices ob- tained in the Ho-Lee model?

Question 11

What is the main characteristic of an afine model?

Question 12

What is the main difference of the Hull-White model with the Vasicek model?

Question 13

What are the characteristics of Normal models?

Question 14

If a model dosen't fit the term structure what can be happening?

Question 15

When pricing options under the Hull-White, what are the important dif- ferences with the Vasicek model?

Question 16

What is a log-normal model? When are they used?

Question 17

How realistic is the the term structure of volatility in the Ho-Lee model?

Question 18

In what aspect is the Hull-White model similar to the Ho-Lee model?

Question 19

What advantage does the Ho-Lee model hold over the Vasicek model?

Question 20

Explain how each paramet in the Hull-White model is determined.