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Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like SOFR or federal funds rate, plus a quoted spread (also known as quoted margin). The spread is a rate that remains constant.
When the volatility and drift of the instantaneous forward rate are assumed to be deterministic, this is known as the Gaussian Heath–Jarrow–Morton (HJM) model of forward rates. [1]: 394 For direct modeling of simple forward rates the Brace–Gatarek–Musiela model represents an example.
The two cash flows are usually referred to as "legs" of the swap; one of these "legs" is usually pegged to a floating rate such as LIBOR. This leg is also commonly referred to as the "floating leg". The other leg of the swap is based on the performance of either a share of stock or a stock market index. This leg is commonly referred to as the ...
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The total rate paid by the customer varies, or "floats", in relation to some base rate. The term of the loan may be substantially longer than the basis from which the floating rate loan is priced; for example, a 25-year mortgage may be priced off the 6-month prime lending rate. Floating rate loans are common in the banking industry and for ...
Binomial Lattice for equity, with CRR formulae Tree for an bond option returning the OAS (black vs red): the short rate is the top value; the development of the bond value shows pull-to-par clearly . In quantitative finance, a lattice model [1] is a numerical approach to the valuation of derivatives in situations requiring a discrete time model.
Other common pricing-methods are simulation and PDEs. Option-adjusted spread (OAS) is the yield spread which has to be added to a benchmark yield curve to discount a security's payments to match its market price, using a dynamic pricing model that accounts for embedded options. OAS is hence model-dependent.
Equilibrium pricing Equities; foreign exchange and commodities Capital asset pricing model; Consumption-based CAPM; Intertemporal CAPM; Single-index model; Multiple factor models. Fama–French three-factor model; Carhart four-factor model; Arbitrage pricing theory; Bonds; other interest rate instruments Vasicek; Rendleman–Bartter; Cox ...