Question

What tools are available for forecasting interest rates? How is this used/important?

Answer 1

Stochastic Process: Interest rates are unpredictable and changes with time. They do not remain fixed. They keep on fluctuating. In this process, interest rates are decided keeping in mind whether variables are changing at continuous fixed rate or with fluctuations.

Markov Stochastic Process: Interest rates are decided on the basis of past variables, accordingly the present and future values will be decided. Interest rates are decided on the basis of mean, variances and probability distribution.

Wiener Process : This process is advanced form of Markov Stochastic process where rates are computed on the basis of normal distribution. Under this method drifts and variance rates are considered.

Ito’s Process: In this process drift and variance rates have dependency on past variables. Due to which drift and variance rates change with time.

Monte Carlo Simulation: This method depends on expected probability distribution. It considers the probability distribution of the variable that needs to be stimulated. It focuses on innovative outcomes within process.