Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
4645754 | Applied Numerical Mathematics | 2009 | 18 Pages |
Abstract
We consider the valuation of interest rate products with effected cash flow under a multifactor Heath–Jarrow–Morton (HJM) model of the term-structure of interest rates by hierarchical approximation. At the higher-level, we apply a stochastic spectral approximation of the forward rates and exhaust an indexed family of regularized Hamilton–Jacobi characterizations of the value function. At the lower-level, we utilize penalization and an extrapolation method-of-lines finite element method. Application to interest rate caps and an American discount bond option are considered in order to demonstrate the applicability of the method.
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