A valuation model which is used to price interest rate options using mean reversion to generate a future interest rate. Technically speaking, it is a single-factor, no-arbitrage yield curve model which is based on a random factor or state variable (being the short-term interest rate). This rate is assumed by the model to be normally distributed and subject to mean reversion. In the special case where the principal parameter (mean reversion) is set equal to zero, this model coincides with the earlier model of Ho and Lee.
The Hull-White model is practically calibrated by picking up the standard deviation of the short-term rate and the mean reversion parameter such that their values are consistent with actual price options.
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