Valuation of Interest Rate Derivatives on Risk-Free Rates under the Hull-White Model

The shift from LIBOR to alternative risk-free rates (RFRs), which are based on actual overnight market transactions, has highlighted the need to refine pricing models to align with new interest rate benchmarks. This thesis studies the valuation of interest-rate derivatives under the one-factor Hull–White model in an overnight-rate world, with special focus on caplets whose floating leg is defined by a compounded-in-arrears and arithmetic-average RFRs. The model is introduced through its stochastic differential equations and key pricing formulas for caplets. Emphasis is placed on the theoretical foundations and practical considerations of the model. A numerical comparison evaluates model behavior across a range of parameter settings. The analysis highlights the strengths and limitations of the model in capturing rate dynamics under current market conditions, providing insights into its suitability for the valuation of RFR-based interest rate derivatives.