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The Paradigm Interest Rate Option Problem

In: Derivative Security Pricing

Author

Listed:
  • Carl Chiarella

    (University of Technology Sydney)

  • Xue-Zhong He

    (University of Technology Sydney)

  • Christina Sklibosios Nikitopoulos

    (University of Technology Sydney)

Abstract

There are a number of instruments in interest rate markets that are equivalent to an option on an interest rate or an option on a bond. In this chapter we focus on the interest rate caps, which are call options on an interest rate. We show that they can be interpreted as a put option on a bond. The problem of pricing such bonds, and hence the interest rate cap, shall motivate much of the discussion in subsequent chapters. In the last section we briefly discuss the issues associated with the interest rate option problem that distinguish it from the option pricing problem in a world of deterministic interest rates.

Suggested Citation

  • Carl Chiarella & Xue-Zhong He & Christina Sklibosios Nikitopoulos, 2015. "The Paradigm Interest Rate Option Problem," Dynamic Modeling and Econometrics in Economics and Finance, in: Derivative Security Pricing, edition 127, chapter 0, pages 431-437, Springer.
    • Handle: RePEc:spr:dymchp:978-3-662-45906-5_21
    DOI: 10.1007/978-3-662-45906-5_21
    as

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