On pricing of interest rate derivatives

On pricing of interest rate derivatives

At present, there is an explosion of practical interest in the pricing of interest rate (IR) derivatives. Textbook pricing methods do not take into account the leptokurticity of the underlying IR process. In this paper, such a leptokurtic behaviour is illustrated using LIBOR data, and a possible martingale pricing scheme is discussed.

Pricing Interest Rate-Sensitive Credit Portfolio Derivatives

In this paper we present a modelling framework for portfolio credit risk which incorporates the dependence between risk-free interest-rates and the default loss process. The contribution in this approach is that – besides the traditional diffusionbased covariation between loss intensities and interest-rates – a direct dependence between interest-rates and the loss process is allowed, in particu...

Pricing Interest Rate Options

We price moneyness-based portfolio returns on the LIBOR futures options in an Intertemporal CAPM framework as an extension of the pricing kernel approach. In contrast to existing studies for pricing index options, our results show that only the real interest rate is significant in the pricing kernel for LIBOR options. The polynomial pricing kernel with linear interpretation outperforms the iso-...

Interest Rate Derivatives

A Joint Framework for Consistently Pricing Interest Rates and Interest Rate Derivatives

Dynamic term structure models explain the yield curve variation well but perform poorly in pricing and hedging interest rate options. Most existing option pricing practices take the yield curve as given, thus having little to say about the fair valuation of the underlying interest rates. This paper proposes an m + n model structure that bridges the gap in the literature by successfully pricing ...