Serving the Quantitative Finance Community

User avatar
Topic Author
Posts: 7
Joined: February 28th, 2005, 3:34 pm

Interest Rates

September 29th, 2006, 8:13 am

Hi,I'm just trying to learn some new stuff on interest rates. If you want to price an option lets say for a stock you can use the Black Sholes equation very easily to get a value. If I have an interst rate option can I not do the same. I have all the numbers to plug in. Isnt that the same case with say an interest rate swaption. I thought that you could quite easily do that. Where do all these models come in like hull white and BGM. why do we need them. Thanks in advance to you guys for explaining stuff to me.
User avatar
Posts: 1102
Joined: May 20th, 2002, 9:13 pm

Interest Rates

September 29th, 2006, 8:55 am

Have moved my response to the student forum.
Last edited by gjlipman on September 28th, 2006, 10:00 pm, edited 1 time in total.
User avatar
Posts: 1
Joined: May 4th, 2006, 2:45 pm

Interest Rates

February 7th, 2007, 11:42 am

Hi I would very much appreciate it if somebody could explain to me the link between Libor and the Bank of Englands base rate, if there is any.
User avatar
Posts: 58
Joined: December 18th, 2003, 10:28 pm

Interest Rates

February 26th, 2007, 5:01 pm

This is an economics question rather than an FE question - but I will do my best.The BOE base rate is the minimum interest rate at which banks can lend from the bank of england OVERNIGHT. Hence, the 3m GBP Libor rate is the market's expectation of the changes of the BOE rate over the coming months with an additional incorporated credit risk.
User avatar
Posts: 2
Joined: October 30th, 2006, 10:20 pm

Interest Rates

August 25th, 2007, 5:00 am

Yes you can. I work for an Australian Bank and we use Black Sholes to price Vanilla Interest Rate Options. If you have access to Reuters, you can get implied volatilities for USD Interest Rate Caps by typing in USDCAP=TTKL, AUD Interest Rate Caps by typing in AUDCAP=TTKL etcInterest Rate Caps are Call Options where the underlying asset is an Interest Rate Swap.
User avatar
Posts: 3256
Joined: July 18th, 2006, 5:49 am

Interest Rates

August 27th, 2007, 8:56 am

LIBOR is the rate at which banks lend each other cash, for various periods of time. Key point here is that LIBOR is unsecured cash.The BOE base rate is a base rate, which determines the effective rate at which the Bank of England will lend you money (through the OMO process or the standing facility). However, the BoE lends secured, i.e. it will give you cash only in exchange for certain collateral.So, simplistically, LIBOR is a rate which not only incorporates the economy-wide tightness of money, as measured by the BoE rate, but also the availability of money in the interbank mkt. Hence, this whole credit crunch situation that people have been going on about...Cheers and hope this helps..