In this paper, we examine a two-factor option pricing model, that could be used within a system to manage the total interest rate position of a financial institution. We deduce the theoretical features that are required for such a model and we discuss issues related to the implementation of the model. In particular, the problem of adapting the model to the current market information is addressed. The results of an empirical study within the market of German interest rate warrants show that the prediction quality of the model is considerable
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