Article ID Journal Published Year Pages File Type
476083 Computers & Operations Research 2008 12 Pages PDF
Abstract

We present an spectral numerical method for the numerical valuation of bonds with embedded options. We use a CIR model for the short-term interest rate. The method is based on a Galerkin formulation of the partial differential equation for the value of the bond, discretized by means of orthogonal Laguerre polynomials. The method is shown to be very efficient, with a high precision for the type of problems treated here and is easy to use with more general models with nonconstant coefficients. As a consequence, it can be a possible alternative to other approaches employed in practice, specially when a calibration of the parameters of the model is needed to match the observed market data.

Related Topics
Physical Sciences and Engineering Computer Science Computer Science (General)
Authors
,