Application Of The Term Structure Estimation In The Pricing Of Interest Rate Derivatives

In recent years, With the development of interest rate derivative products (IRDP) on the international financial market. The trade scale of IRDP has been enlarged and role enhanced. Valuing these IRDP rationally and precisely has been increasingly important.Based on the research of foreign scholars. This paper studies three methods of term structure estimation (linear interpolation, spline interpolation, cubic interpolation) proceeding from methods of term structure estimation about yield curve that affect the valuation of IRDP. Through applying the three methods of term structure estimation to the construction of zero-yield curve and to the pricing of zero-bond, zero-bond option, coup bond, interest rate swap, interest rate swap option, interest rate cap, interest rate floor, forward rate agreement. Comparing the calculation errors of the three methods of term structure estimation. This paper reaches a conclusion that the three methods of term structure estimation lead to the difference of the pricing of IRDP and that the cubic interpolation is the best method when these methods are applied to construction of zero-yield curve and evaluation of coup bond, zero-bond option and interest rate swap. But when these methods are applied to evaluation of interest rate swap option, interest rate cap, interest rate floor, forward rate agreement, Both the cubic interpolation and the spline interpolation are superior to the linear interpolation, but the cubic interpolation and the spline interpolation are almost same.In a word, because the cubic interpolation is superior to the other two methods, we should use the cubic interpolation for construction of zero-yield curve and for evaluation of the IRDP as far as possible.