Valuation of Convexity Related Interest Rate Derivatives

Interest Rate Derivatives

Generalized Swap Market Model And the Valuation of Interest Rate Derivatives

In this paper we will establish a generalized Swap Market Model (GSMM) by unifying the stochastic process of swap rates with constant tenors under a single swap measure. GSMM is a natural extension of Libor Market Model (LMM) for swap rates, and LMM can be considered as a special case of GSMM since Libors is a special swap rate with the constant tenor of one period. GSMM can be applied for pric...

Interest Rate, Currency and Equity Derivatives Valuation Using the Potential Approach

Based on the potential approach to interest rate modeling, we introduce a simple tractable model for the unified valuation of interest rate, currency and equity derivatives. Our model is able to accommodate the initial term structure of zero-coupon bond prices, generate positive and bounded interest rates, and handle cross products such as differential swaps, quanto options, and equity swaps. A...

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.

Risk-neutral hedging of interest rate derivatives

In this paper we review the hedging of interest rate derivatives priced under a risk-neutral measure, and we compute self-financing hedging strategies for various derivatives using the Clark-Ocone formula.