The Ho-Lee model is an important concept of financial mathematics. The Ho-Lee Model deals with rates of interest that are supposed to prevail in the future.
It is regarded as a very simple model as it can be adjusted as per information collected from markets. The Ho-Lee model could also be called a term structure model. It was the first of its kind in financial mathematics.
Description of Ho-Lee Model
considers the current yield curve to be fixed. It constructs a binomial model that lies close to this current yield curve. To be exact, the price curve or the discount factor curve is very important in this context.
it is assumed that there would be one up term structure and one down term structure from a given term structure that is made up of discount factors. The period considered in this case is that of a year.
Equational Representation of Ho-Lee Model
The equational representation of the Ho-Lee model is as follows:
drt = φtdt + σdWt
Last Updated on : 1st July 2013