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Pricing Interest-Rate-Derivative Securities

Review of Financial Studies · 1990 · Vol. 3(4) · pp. 573–592

John Hull✉(University of Toronto)Alan White(University of Toronto)

Abstract

This article shows that the one-state-variable interest-rate models of Vasicek (1977) and Cox, Ingersoll, and Ross (1985b) can be extended so that they are consistent with both the current term structure of interest rates and either the current volatilities of all spot interest rates or the current volatilities of all forward interest rates. The extended Vasicek model is shown to be very tractable analytically. The article compares option prices obtained using the extended Vasicek model with those obtained using a number of other models.

Stochastic processes and financial applications Capital Investment and Risk Analysis Economic theories and modelsVasicek modelInterest rateShort-rate modelCox–Ingersoll–Ross modelRendleman–Bartter modelInterest rate derivativeEconometricsCurrent (fluid)EconomicsMonetary economics

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The pricing of commodity contracts