A financial model used to value interest rate options based on a single factor (a single stochastic input), which is the short-term interest rate. The model is typically constructed taking into account the existing structure of zero-coupon yields and sometimes the term structure of yield volatilities. A binomial tree is built to draw a representation for the structure of short term interest rate such that zero bond prices extracted from the binomial tree are precisely equal to a set of zero bond prices currently observable in the market.
November 13, 2023
