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Term structure movements implicit in Asian option prices

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  • Caio Almeida
  • Jos� Vicente

Abstract

In this paper we implement dynamic term structure models that adopt bonds and Asian options in the estimation process. The goal is to analyse the pricing and hedging implications of term structure movements when options are (or are not) included in the estimation process. We investigate how options affect the shape, risk premium and hedging structure of the dynamic factors. We find that the inclusion of options affects the loadings of the slope and curvature factors, and considerably changes the risk premium and hedging structure of all dynamic factors.

Suggested Citation

  • Caio Almeida & Jos� Vicente, 2012. "Term structure movements implicit in Asian option prices," Quantitative Finance, Taylor & Francis Journals, vol. 12(1), pages 119-134, February.
    • Handle: RePEc:taf:quantf:v:12:y:2012:i:1:p:119-134
    DOI: 10.1080/14697681003720253
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    Cited by:

    1. Daniela Kubudi & José Valentim Vicente, 2016. "A Joint Model of Nominal and Real Yield Curves," Working Papers Series 452, Central Bank of Brazil, Research Department.
    2. Allan Jonathan da Silva & Jack Baczynskiy & José Valentim M. Vicente, 2015. "A Discrete Monitoring Method for Pricing Asian Interest Rate Options," Working Papers Series 409, Central Bank of Brazil, Research Department.
    3. Almeida, Caio & Vicente, José, 2009. "Are interest rate options important for the assessment of interest rate risk?," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1376-1387, August.
    4. Xingchun Wang, 2020. "Analytical valuation of Asian options with counterparty risk under stochastic volatility models," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 410-429, March.
    5. Allan Jonathan da Silva & Jack Baczynski & Leonardo Fagundes de Mello, 2023. "Hedging Interest Rate Options with Reinforcement Learning: an investigation of a heavy-tailed distribution," Business and Management Studies, Redfame publishing, vol. 9(2), pages 1-14, December.
    6. José Valentim Machado Vicente, 2021. "A Non-Knotty Inflation Risk Premium Model," Working Papers Series 543, Central Bank of Brazil, Research Department.
    7. Allan Jonathan da Silva & Jack Baczynski & José Valentim Machado Vicente, 2020. "Efficient Solutions for Pricing and Hedging Interest Rate Asian Options," Working Papers Series 513, Central Bank of Brazil, Research Department.
    8. Alan De Genaro & Marco Avellaneda, 2018. "Pricing Interest Rate Derivatives Under Monetary Changes," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(06), pages 1-28, September.

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