In this article we define a multi-factor equity-interest rate hybrid model with non-zero correlation between the stock and interest rate. The equity part is modeled by the Heston model [Heston-1993] and we use a Gaussian multi-factor short rate process [Brigo,Mercurio-2007; Hull-2006]. By...

This article computes empirical option costs for fixed rate mortgages and compares them to brokers' forecasts. Estimates of risks for mortgage derivatives such as IOs are also examined and shown to have very substantial errors and very substantial differences in the forecasts by different brokers