A spectral method for bonds

Authors:
Javier de Frutos
Affiliations:
Departamento de Matemática Aplicada, Universidad de Valladolid, Spain
Venue:
Computers and Operations Research
Year:
2008

Citing 4
Cited 1

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Abstract

We present an spectral numerical method for the numerical valuation of bonds with embedded options. We use a CIR model for the short-term interest rate. The method is based on a Galerkin formulation of the partial differential equation for the value of the bond, discretized by means of orthogonal Laguerre polynomials. The method is shown to be very efficient, with a high precision for the type of problems treated here and is easy to use with more general models with nonconstant coefficients. As a consequence, it can be a possible alternative to other approaches employed in practice, specially when a calibration of the parameters of the model is needed to match the observed market data.