## Abstract

In this paper we study algorithms for pricing of interest rate instruments using recombining

tree (scenario lattice) interest models. The price is defined as expected discounted cash flow. If the

cash-flow generated by the instrument depends on the full or partial history of interest rates (pathdependent

contracts), then pricing algorithms are typically of exponential complexity. We show that

for some models, including product form cash-flows, additive cash-flows, delayed cash-flows and

limited path-dependent cash-flows, polynomial pricing algorithms exist

tree (scenario lattice) interest models. The price is defined as expected discounted cash flow. If the

cash-flow generated by the instrument depends on the full or partial history of interest rates (pathdependent

contracts), then pricing algorithms are typically of exponential complexity. We show that

for some models, including product form cash-flows, additive cash-flows, delayed cash-flows and

limited path-dependent cash-flows, polynomial pricing algorithms exist

Original language | English |
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Pages (from-to) | 291 - 309 |

Journal | Computational Economics |

Volume | 28 |

Issue number | 3 |

Publication status | Published - 1 Nov 2006 |