Heath Jarrow Merton (HJM) Interest Rate Model – Topic Guide

Interest rate simulation and forecasting models are employed to value instruments which are dependent on interest. Interest rate models are defined by state variables and their processes. The values taken by the state variables give the position or state of the item being model. Buy Now

The processes determine how the state variables change over time. Model processes may depend on the evolution of a single factor or multiple factors. The HJM interest rate no-arbitrage model is an example of the latter.


EXCEL files

The HJM interest rate model course is a pre-packaged deal of 3 EXCEL files that cover the following concepts:

    1. Zero Coupon and Forward Rates Term Structures derivation and construction (pre-requisite)
    2. Principal Component Analysis (PCA) used to determine the number of workable factors for the HJM interest rate model. This includes:
      • Data selection and adjustment
      • Construction of the Covariance, eigenvector and diagonal matrices
      • Set up and running of Solver functionality to obtain solutions for eigenvectors and eigenvalues
      • Determination of  number of component/ factors to be used in the HJM model
      • Determination of functional forms for selected eigenvectors
      • Determination of weights for functional forms through derived volatility calibration
    3. Example of the construction of a three factor HJM interest rate model in EXCEL. This includes:
      • The definition of input cells (e.g. initial yield (zero) rates and the volatility functions),
      • The definition of calculation cells (e.g. Brownian shocks, drifts, forwards and spot rates) and
      • The definition of output cells (e.g. price matrix, path prices and true prices)

back to top


Random Testimonial

  • ~ Corporate Training Testimonials

    "A most amazing training - hands down the best, most useful, and most relevant I had during my tenure. Simply put, I loved it and will continue to build on the models. 

    Financial Modeling Course Participant
    FGB Training Academy, 
    First Gulf Bank, Abu Dhabi, UAE


    I have attended a number of training courses conducted by Alchemy technologies. Broadly, the areas covered have been Financial Risk Management aspects, Basel II implementation in Pakistan, as well as product knowledge for relatively new products in the our market for instance Financial Derivatives. As trainers, Mr. Jawwad Farid and his team bring in a wealth of conceptual knowledge entwined with their own professional experiences, adapting and honing it to our local market needs. The training courses are very informative and are delivered in a witty and energetic manner. The learning needs of the participants are kept in focus, and they are kept involved by interactive discussions and queries. Personally, I have always left these sessions with a much better understanding and grasp over the subjects delivered, which has helped me professionally.”

    Senior Manager & Team Leader
    Treasury Middle Office
    Habib Bank Limited


    “Jawwad Farid has admirably led the training piece on the Treasury side covering Treasury risk, Treausury products, Derivatives (basic & Advanced), Fixed income securities (Basic & Advanced) and ALM training modules. Jawwad in our opinion is an “Outstanding Senior Trainer” who has deep subject matter knowledge and an uncanny ability to keep the participants engaged in the training process. So far our clients have expressed maximum level of satisfaction in Jawwad’s capability to deliver high value training programs, that have tangibly enhanced their staff’s skill sets.

    Based on our direct more than satisfactory experience, Jawwad’s otherwise exceptional track record on the training side with over 90 technical skill building courses in South Asia, Middle Eastern and Far Easterm markets, we have no hesitation in strongly recommending Jawwad Farid for the training that for participants based out of Malaysia or the adjoining Far Eastern Markets.”

    Mohammad Nasr Ullah
    Principal Consultant
    Consultnomics, FZE


    I have loved each and every workshop from Alchemy. The workshops are extremely helpful in removing queries about Derivatives Pricing, Basel & Regulatory issues. I feel attending the workshops have added value to my knowledge and expertise. Moreover, the instructor is extremely knowledgeable on the subject area and ensures that each candidate returns with similar knowledge and expertise.

    Senior Vice President
    Allied Bank"

  • Read more testimonials »