Valuation of Path-Dependent Interest Rate Derivatives in a Finite Difference Setup

In this paper we study and implement a finite difference version of the augmented <p> state variable approach proposed by Hull & White (1993) that allows for pathdependent <p> securities. We apply the method to a class of path-dependent interest <p> rate derivatives and consider several examples including mortgage backed securities <p> and collateralized mortgage obligations. The efficiency of the method is assessed in <p> a comparative study with Monte Carlo simulation and we find it to be faster for a <p> similar accuracy.