m4fe (version 0.1)

bdt: Black-Derman-Toy Interest Rate Tree

Description

Constructs the short rate tree using the data calibration model proposed by Black and Derman

Usage

bdt(yields, volatilities)

Arguments

yields

The historical zero-coupon bond yields

volatilities

The volatilities in force for each of the zero-coupon bonds at time 1. Note that volatilites[1] is undefined

Details

uses a version of newtons method that generalizes to n dimensions. May not converge for particular historical data

Examples

bdt(yields=c(0.10, 0.11, 0.12, 0.125), volatilities=c(NA, 0.10, 0.15, 0.14))