In the latter case, one calibrates the model parameters to fit both the current term structure of interest rates (yield curve), and the yield curve's volatility structure.
A related concept is that of term structure of volatility, which describes how (implied) volatility differs for related options with different maturities.
The cost of debt is computed by taking the rate on a risk-free bond whose duration matches the term structure of the corporate debt, then adding a default premium.
For this reason, it is important the valuation model is well calibrated to the volatility term structure of the underlying, at least at the strikes implied by the range.
His research focuses on fixed income markets, term structure, derivatives, credit risk, computational finance and the role of arbitrage in financial markets.
