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  • October 14, 2015: IAQF & Thalesians Seminar Series

October 14, 2015: IAQF & Thalesians Seminar Series

  • 14 Oct 2015
  • 5:45 PM (EDT)
  • NYU Kimmel Center, Room 914, 60 Washington Square South, New York, NY

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Can one price Eurodollar futures in the
Black-Derman-Toy model?

A Talk by Dr. Dan Pirjol




 
Abstract

Interest rates models with log-normally distributed rates in continuous time are known to display singular behavior. For example, Eurodollar futures prices are infinite in the Dothan and Black-Karasinski models, as shown in 1998 by Hogan and Weintraub. These singularities are usually assumed to disappear when the models are simulated in discrete time. Using a precise simulation of the BDT model, we demonstrate that this is true only for sufficiently low volatilities. Eurodollar futures prices explode for volatilities above a critical value. The explosion is due to contributions from a region in state space which corresponds to very large interest rates and is truncated off in usual simulation methods such as trees and finite difference methods. In the limit of a very small simulation time step the explosion appears for any volatility, and reproduces the Hogan-Weintraub singularity of the continuous time model.


Biography

Dan Pirjol works in the Model Risk Group at JP Morgan, covering valuation models in commodities. Previously he was with Markit and Merrill Lynch in various roles in modeling and model risk, after doing research in theoretical high energy physics. He is interested in applications of methods from mathematical physics and probability to problems in mathematical finance.



About the Series

The IAQF's Thalesians Seminar Series is a joint effort on the part of the IAQF (www.iaqf.org) and the Thalesians (www.thalesians.com). The goal of the series is to provide a forum for the exchange of new ideas and results related to the field of quantitative finance. This goal is accomplished by hosting seminars where leading practitioners and academics present new work, and following the seminars with a reception to facilitate further interaction and discussion. 


Registration Fees:
Complimentary for IAQF members through this site
Thalesians Members can register here for $25
Non-Members: $25.00 by registering through this site
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