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Rev Fin 1990; 3:573-592
© 1990 the Society for Financial Studies

Article

Pricing interest-rate-derivative securities

J Hull and A White
Faculty of Management, University of Toronto, 246 Bloor Street, Toronto, Ontario, Canada M5S 1V4

Abstract

This article shows that the one-state-variable interest-rate models of Vasicek (1977) and Cox, Ingersoll, and Ross (1985b) can be extended so that they are consistent with both the current term structure of interest rates and either the current volatilities of all spot interest rates or the current volatilities of all forward interest rates. The extended Vasicek model is shown to be very tractable analytically. The article compares option prices obtained using the extended Vasicek model with those obtained using a number of other models.


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