Analytical Valuation of Barrier Interest Rate Options Under Market Models

Barrier caps, floors, and swaptions are priced in a closed form via the time-chanced technique under the market models. The parameters of the resulting formulas can be easily extracted from market data. This makes the pricing formulas more easily implemented in practice. In addition, the monitoring...

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Bibliographic Details
Published in:The Journal of derivatives 2009-10, Vol.17 (1), p.21-37
Main Authors: Wu, Ting-Pin, Chen, Son-Nan
Format: Article
Language:English
Subjects:
Hedging
Interest rate swaps
Options trading
Securities prices
Studies
Valuation methods
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Summary:Barrier caps, floors, and swaptions are priced in a closed form via the time-chanced technique under the market models. The parameters of the resulting formulas can be easily extracted from market data. This makes the pricing formulas more easily implemented in practice. In addition, the monitoring of the barrier crossing is based on the observable forward LIBOR and swap rates, which helps hedging operations. [PUBLICATION ABSTRACT]
ISSN:1074-1240
2168-8524
DOI:10.3905/JOD.2009.17.1.021