Reading 24
The Arbitrage Free Valuation Framework
3 modules 17 min
0/3
Exam Focus
This topic review discusses valuation of fixed income securities using spot rates as well as using the backward induction methodology in a binomial interest rate tree framework. Understand how embedded options impact the suitability of the binomial model or the Monte Carlo simulation method.
Modules
- Module 24.1Binomial Trees, Part 1Explain what is meant by arbitrage free valuation of a fixed income instrument. · Calculate the arbitrage free value of an option free, fixed rate coupon bond. · Describe a binomial interest rate tree framework. · Describe the backward induction valuation methodology and calculate the value of a fixed income instrument given its cash flow at each node.6 min · 4 LOS
- Module 24.2Binomial Trees, Part 2Describe the process of calibrating a binomial interest rate tree to match a specific term structure. · Compare pricing using the zero coupon yield curve with pricing using an arbitrage free binomial lattice. · Describe pathwise valuation in a binomial interest rate framework and calculate the value of a fixed income instrument given its cash flows along each path. · Describe a Monte Carlo forward rate simulation and its application.8 min · 4 LOS
- Module 24.3Interest Rate ModelsDescribe term structure models and how they are used.3 min · 1 LOS