The General Hull-White Model and Super Calibration
August 2000
John Hull, and Alan White
ABSTRACT
Term structure models are widely used to price interest-rate derivatives such as caps and bond options and options
embedded in securities such as callable bonds. This paper describes how a general one-factor model of the short-rate
can be implemented as a recombining trinomial tree that is calibrated to market prices of interest-rate options
such as swaptions. 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-of-the-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.
Subject: Investment/Derivatives, Investment/Fixed Income,Valuation
Classification: Theoretical, Empirical
John Hull
Institution: Stern School of Business, New York University
Email: jhull@stern.nyu.edu
Telephone: (212) 998-0758
Home Page: http://www.stern.nyu.edu/~hull
Alan White
Institution: Joseph L. Rotman School of Management, University of Toronto
Email: awhite@rotman.utoronto.ca
Telephone: (416) 978 3689
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