A tractable market model with jumps for pricing short-term interest rate derivatives
Short-term interest rate derivatives present a few unresolved problems. It is not obvious which pricing model to use, and the usual Heath-Jarrow-Morton type models seem insufficient to describe the risk they entail. Moreover, the hedging process is fairly delicate as the liquidity of short-term products cannot always be relied upon. In this paper, we justify the use of a market model with jumps to price these products. The main advantage of this approach is two fold. First, we will show how realistic such a model proves to be. Then, using justified approximations, the market model with jumps is made very tractable. Finally, the hedging issue is resolved by describing a dynamic delta-hedging strategy provided by the model in addition to a static vega-hedging strategy designed to use the relevant liquid products at the trader's disposal.
Volume (Year): 1 (2001)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RQUF20 |
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RQUF20|
When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:1:y:2001:i:2:p:270-283. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.