Study and implementation of Vasicek model

Abstract

In finance, interest rate has a place in most of the important calculations. Its implications are felt widely in pricing of credit, derivatives & in calculation of economic capital for financial institutions. It is therefore highly desirable to have a model that can model & predict interest rates. One-factor models are those used to predict short-term interest rates. All such models are stochastic problems, dealing with uncertainty. The first such model was introduced by Merton in 1973, followed by Vasicek in 1977.