In financial mathematics, the Ho–Lee model is a short rate model

Short rate model

In the context of interest rate derivatives, a short-rate model is a mathematical model that describes the future evolution of interest rates by describing the future evolution of the short rate, usually written r_t \,.-The short rate:...

 used in the pricing of bond option

Bond option

In finance, a bond option is an option to buy or sell a bond at a certain price on or before the option expiry date. These instruments are typically traded OTC....

s, swaptions and other interest rate derivatives, and in modeling future interest rate

Interest rate

An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

s. It is the simplest model that can be calibrated to market data, by implying the form of from market prices. Ho and Lee does not allow for mean reversion

Mean reversion

Mean reversion is a mathematical concept sometimes used for stock investing, but it can be applied to other assets. In general terms, the essence of the concept is the assumption that both a stock's high and low prices are temporary and that a stock's price will tend to move to the average price...

. It was developed in 1986 by Thomas Ho

Thomas Ho (finance)

Thomas Ho is a finance consultant, practitioner and academic. He is best known as developer of the Ho-Lee short rate model, the first arbitrage-free model of that type, and of key rate durations, a widely used interest rate risk measure...

and Sang Bin Lee.

External links

• Valuation and Hedging of Interest Rates Derivatives with the Ho-Lee Model, Markus Leippold and Zvi Wiener, finance.wharton.upenn.edu