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Implied interest rate pricing models

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Author Info

  • J.E. Kennedy

    ()
    (Department of Statistics, University of Oxford, 1 South Parks Road, Oxford OX1 3TG, UK Manuscript)

  • P.J. Hunt

    ()
    (ABN-AMRO Bank, Structured Products Group, 199 Bishopsgate, London EC2M 3TY, UK)

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    Abstract

    We show how market prices for standard interest rate products can be used, under the assumption of a one-factor model, to imply the joint distribution of zero coupon bonds of differing maturities at a fixed date $T$ in the future. We relate these results to the solution of an optimisation problem arising in the pricing of amortising swaptions. Finally, we apply these ideas to price (and hedge) products of importance in the interest rate derivatives market.

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    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 2 (1998)
    Issue (Month): 3 ()
    Pages: 275-293

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    Handle: RePEc:spr:finsto:v:2:y:1998:i:3:p:275-293

    Note: received: March 1997; final version received: May 1997
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    Web page: http://www.springerlink.com/content/101164/

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    Related research

    Keywords: Interest rate models; swaptions;

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    Cited by:
    1. Marek Rutkowski, 1999. "Models of forward Libor and swap rates," Applied Mathematical Finance, Taylor & Francis Journals, vol. 6(1), pages 29-60.

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