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A Term Structure Model and the Pricing of Interest Rate Derivative

Listed author(s):
  • K. Sandmann
  • Sondermann, D.

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.

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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 180.

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Date of creation: Mar 1993
Handle: RePEc:bon:bonsfb:180
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Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany

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References listed on IDEAS
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  1. Sandmann,Klaus, "undated". "An intertemporal interest rate market model: Complete markets," Discussion Paper Serie B 94, University of Bonn, Germany.
  2. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305 World Scientific Publishing Co. Pte. Ltd..
  3. Klaus Sandmann, 1993. "The Pricing of Options With an Uncertain Interest Rate: A Discrete-Time Approach," Mathematical Finance, Wiley Blackwell, vol. 3(2), pages 201-216.
  4. 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.
  5. Muller, Sigrid M., 1989. "On complete securities markets and the martingale property of securities prices," Economics Letters, Elsevier, vol. 31(1), pages 37-41.
  6. Sandmann,Klaus & Sondermann,Dieter, "undated". "Zur Bewertung von Caps und Floors," Discussion Paper Serie B 98, University of Bonn, Germany.
  7. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
  8. Sandmann,Klaus & Sondermann,Dieter, "undated". "A term structure model and the pricing of interest rate options," Discussion Paper Serie B 129, University of Bonn, Germany.
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