Black-Derman-Toy Model

The Black-Derman-Toy (BDT) model is a mathematical framework used by financial professionals to forecast future interest rates and value interest rate-related derivatives. It assumes that interest rates evolve over time following a stochastic process, influenced by randomness but structured in a way that fits historical data. By modeling how interest rates change, the BDT model helps in pricing bonds, options, and other financial instruments, providing a systematic way to assess risk and make informed investment decisions. Essentially, it offers a realistic approach to understanding future interest rate behaviors for market analysis.