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Published in:
2016 | OriginalPaper | Chapter
Equity-interest Rate Hybrids
Author : Oliver Brockhaus
Published in: Equity Derivatives and Hybrids
Publisher: Palgrave Macmillan UK
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The problem of modelling assets with stochastic drift has been studied in order to risk manage long dated foreign exchange derivatives. In that context advanced yield curve dynamics is often combined with simplified foreign exchange smile dynamics. In the equity context the aim is to extend smile consistent models to the stochastic interest rate case. Interest rates dynamics is often limited to single-factor short rate models, such as Hull-White’s extension of the Vasicek model or the Cox-Ingersoll-Ross square root process, discussed in Sections 10.4 and 10.5.