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Describe how the VASICEK MODEL can be applied to the pricing of interest- rate derivatives

Describe how the VASICEK MODEL can be applied to the pricing of interest- rate derivatives

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Answer #1

The VASICEM MODEL is a mathematical method of modeling interest rate and its movement. This model describes the movement of interest rate as factor which includes market risk, time, where the rate tends to revert towards the mean of those factors over time.

Basically it predicts that where the interest rates will end up at the end of a given time period of time taking into account other factors also such as long run mean interest rate value and A given Market risk factor etc.

This concept or the equation can test only one market risk Factor at a time. Thus in this way the model can be applied to the pricing of interest rate derivatives.

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