The Interest Rate Process (IRP), from Fidelity National Information Services, Inc.’s (FIS) Applied Analytics, is a unique trading quality (arbitrage-free) interest rate process that is able to simultaneously price ITM and OTM caps, floors and swaptions. This unique ability is highly desirable when performing calculations for MBS.

The Interest-Rate Generation Process

The industry has seen numerous attempts to generate sets of possible future interest-rate realizations that are completely arbitrage-free and consistent with the term structure of interest rates and volatilities.

There is another requirement as well: The process should have a tree implementation for a straightforward evaluation of American-style options. In addition, probably the most important requirement is that it should take a finite computation time.

Mathematical Details

It can be shown that v  is the excess slope of the yield curve for a given time on a given node versus the average expected slope.

It can also be shown that the correlation between changes in the slope and changes in the short rate is:

Interest Rate Process-Fitting Routines

Our fitting routines solve for volatility parameters, so that prices generated from the tree equal current market prices for the entire term structure of caps and swaptions.

Contact Us

Call us at 415.989.9800 or send us an e-mail to find out more about FIS Applied Analytics and how we can add the power of data analytics to your portfolio.