Interest rates affect economic activities at all levels. Central banks, including the Federal Reserve (informally known as the Fed), target interest rates as a policy tool to influence economic activity. Interest rate derivatives are popular with investors who require customized cash flow needs or specific views on interest-rate movements.
One of the key challenges that interest-rate derivative traders face is to have a good and robust pricing procedure for these products. This involves understanding the complicated behavior of an individual interest-rate movement. Several interest-rate models have been proposed for financial studies. Some common models studied in finance are the Vasicek, CIR, and Hull-White models. These interest-rate models involve modeling the short-rate and rely on factors (or sources of uncertainty) with most of them...
