A Term Structure Model and the Pricing of Interest Rate Derivative
AbstractThe paper developes a general arbitrage free model for the term structure of interest rates. The principal model is formulated in a discrete time structure. It differs substantially from the Ho--Lee-- Model (1986) and does not generate negative spot and forward rates. The results for the continuous time limit support this. The probability distribution with finite support is derived for the spot rate return. The model permits the arbitrage free valuation of bond options and interest rate options and produces dynamic portfolio strategies to duplicate these contracts.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 180.
Date of creation: Mar 1993
Date of revision:
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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Arbitrage; Hedging; Interest Rate; Martingale Measure; Option Pricing; Term Structure;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- Phelim Boyle & Ken Seng Tan & Weidong Tian, 2001. "Calibrating the Black-Derman-Toy model: some theoretical results," Applied Mathematical Finance, Taylor & Francis Journals, vol. 8(1), pages 27-48.
- Schlögl, Erik & Daniel Sommer, 1994. "On Short Rate Processes and Their Implications for Term Structure Movements," Discussion Paper Serie B 293, University of Bonn, Germany.
- D. Sondermann & K. Miltersen, 1994. "Closed Form Term Structure Derivatives in a Heath-Jarrow- Morton Model with Log-Normal Annually Compounded Interest Rates," Discussion Paper Serie B 285, University of Bonn, Germany.
- Goldys, B. & M. Musiela & D. Sondermann, 1996. "Lognormality of Rates and Term Structure Models," Discussion Paper Serie B 394, University of Bonn, Germany.
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