The General Hull-White Model and Super Calibration

20 Pages Posted: 4 Nov 2008

See all articles by John C. Hull

John C. Hull

University of Toronto - Rotman School of Management

Alan White

University of Toronto - Rotman School of Management

Date Written: August 2000

Abstract

Term structure models are widely used to price interest-rate derivatives such as swaps and bonds with embedded options. This paper describes how a general one-factor model of the short-rate can be implemented as a recombining trinomial tree and calibrated to market prices of actively traded instruments such as caps and swap options. The general model encompasses most popular one-factor Markov models as special cases. The implementation and the calibration procedures are sufficiently general that they can select the functional form of the model that best fits the market prices. This allows the model to fit the prices of in- and out-ofthe-money options when there is a volatility skew. It also allows the model to work well very low interest-rate economies such as Japan where other models often fail.

Suggested Citation

Hull, John C. and White, Alan, The General Hull-White Model and Super Calibration (August 2000). NYU Working Paper No. FIN-00-024, Available at SSRN: https://ssrn.com/abstract=1295228

John C. Hull

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 978-8615 (Phone)
416-971-3048 (Fax)

Alan White

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3689 (Phone)
416-971-3048 (Fax)

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