Term structure of interest rates and interest rate models: pricing of bonds and interest rate options under Heath - Jarrow - Morton framework

Derivatives were first traded on regulated exchanges in 1975. Since then, there has been a significant growth in derivative markets particularly on interest rate derivatives. Accurate pricing and risk management that are contingent on effective and mathematically sound pricing models are crucial for a sustainable financial system. Thus, the term structure of interest rates and pricing of the derivatives based on interest rates have been studied by many researchers starting with Oldrich A. Vasicek in 1977 and a wide range of literature has been created since then.In Turkey, understanding the dynamics of the interest rate derivatives has become more important day by day after the Turkish Derivatives Exchange (TurkDex) gained functionality in 2005 and trading volumes have showed a heavy increasing trend. As a consequence of this circumstance, the term structure of interest rates, volatility functions and interest rate derivative pricing that can also be used a portfolio management and risk management tool are studied in this dissertation. In addition to this an accurate pricing model was specified and required conditions for a plausible in demand market were examined.