Variance Optimal Cap Pricing Models
AbstractWe propose new closed-form pricing formulas for interest rate options which guarantee perfect compatibility with volatility smiles. These cap pricing formulas are computed under variance optimal measures in the framework of the market model or the Gaussian model and achieve an exact calibration of observed market prices. They are presented in a general setting allowing to study model and numÃ©raire choice effects on the computed prices. NumÃ©raire dependence is particularly emphasized. A numerical example and an empirical application on market data are given to illustrate the practical use of the calibration procedure.
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Bibliographic InfoPaper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 99-07.
Date of creation: 1999
Date of revision:
Other versions of this item:
- Laurent, J.P. & Scaillet, O., 1997. "Variance Optimal Cap Pricing Models," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1999002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 01 Jan 1999.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
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