binomial model
Posted: June 21st, 2004, 6:26 pm
by Patota83
im trying to develop a binomial/trinomial model to price swaptions. I was wondering how hard it would be to implement a two factor model in excel, or whether I should try to stick with a one factor model.since the swaptions markets view interest rates as normal, not log-normal, which model should I use in pricing swaptions using a lattice?
binomial model
Posted: June 22nd, 2004, 6:12 pm
by exotiq
Two factors trees are doable in Excel, but my initial take on them is that the flat-and-simple approach may not be pretty. A simple recombining binomial tree on two factors only grows as n^2, but you'll have to be clever with the offset() function to do it without VBA.I may be wrong, but I understand the market quotes European swaptions treating the swap rate as Black-76 lognormal, but traders may use normal models like Hull-White to trade them or to price Bermudans.A one-factor model, properly calibrated, should be challenging enough to get good, and beyond that a Libor Market Model would probably be better than a two-factor, losing the tree...