Jonathan,

The interest rate being referred to here is the instantaneous risk-free
rate. It's a rather abstract concept here because the equation you're
looking at is the evolution of asset prices within the Black-Scholes
framework; there is no "term structure" of interest rates as such. For
model calibration purposes you could theoretically use whatever
risk-free rate r(0,t) is generated by your bootstrapped/interpolated
market swap curve.

On Tue, 2011-05-17 at 01:43 +0530, B. Jonathan B. Jonathan wrote:

> Hi all, will somebody help me to understand a small phrase from Hull,
> related to Finance? I have just started reading finance, please dont mind if
> it is too silly (I understand I need to work more!)
> 
> While I was reading Hull, I came to a model:
> 
> dS = (rt - qt)Sdt + sigma * dz
> 
> He defines "rt" as : Instantneous Forward Interest Rate for a Contract,
> maturing at Time "t".
> 
> I understand that, a forward instantaneous forward interest rate F(t,T)
> means, the Zero rate applicable for very short period of time in future time
> "T", seen at present time "t".
> 
> Then, how can I interpret this "rt"? what "contract" Hull is refering to? It
> is maturing at "t" (as per his definition), but when is was initiated?
> 
> Thanks for your help.
> 
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