Simulating Interest Rates with Short Rate

Overview

One way to simulate interest rates is to assume that the shape of the curve is fixed, and then to just simulate the level of interest. While this model is not a risk neutral model (see below), the models of the short rate used can be used here. (We are asuming the same structure of the model, but are assuming that the measure being used is the real world measure)

Note - here we are not building a term structure model using the risk neutral measure , which is used to price derivatives. The risk neutral measure will imply that the curve will not be fixed, and will in fact be calculated as an expectation over the short rate.