A Term Structure Model and the Pricing of Interest Rate Derivative
The 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.
|Date of creation:||Mar 1993|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
- Sandmann,Klaus, . "An intertemporal interest rate market model: Complete markets," Discussion Paper Serie B 94, University of Bonn, Germany.
- Klaus Sandmann, 1993.
"The Pricing of Options With an Uncertain Interest Rate: A Discrete-Time Approach,"
Wiley Blackwell, vol. 3(2), pages 201-216.
- Sandmann,Klaus, . "The pricing of options with an uncertain interest rate: A discrete time approach," Discussion Paper Serie B 114, University of Bonn, Germany.
- Sandmann,Klaus & Sondermann,Dieter, . "Zur Bewertung von Caps und Floors," Discussion Paper Serie B 98, University of Bonn, Germany.
- Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
- Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
- Sandmann,Klaus & Sondermann,Dieter, . "A term structure model and the pricing of interest rate options," Discussion Paper Serie B 129, University of Bonn, Germany.
When requesting a correction, please mention this item's handle: RePEc:bon:bonsfb:180. 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: (BGSE Office)
If references are entirely missing, you can add them using this form.