Pay attention to interest

Interest rate volatility is usually ignored when modelling equity,forex or commodity derivatives. In their seminal paper, Black &Scholes (1973) use a constant interest rate. Most of the models developedsince use deterministic interest rate processes. This approximationis justified for short-dated derivatives but, as we shalldemonstrate in this article, interest rate volatility cannot be ignoredin pricing and managing long-dated derivatives.

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