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In-arrears Interest Rate Derivatives under the 3/2 Model

Journal Article


Abstract


  • Lie symmetry methods are used to find a closed form solution for in-arrears swaps under the 3/2 model dr**r(A(t)-ar)dt+cr2dZ. As well, approximate solutions are found for short-tenor inarrears caplets and floorlets under the same interest rate model. Comparisons are made of the approximate option values with those obtained with a computationally-intensive numerical scheme. The approximate pricing is found to be substantially fast and easy to implement, while the relative errors with respect to the “true” prices are very small.

Publication Date


  • 2015

Citation


  • Goard, J. (2015). In-arrears Interest Rate Derivatives under the 3/2 Model. Modern Economy, 6 (6), 707-716.

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/4556

Number Of Pages


  • 9

Start Page


  • 707

End Page


  • 716

Volume


  • 6

Issue


  • 6

Abstract


  • Lie symmetry methods are used to find a closed form solution for in-arrears swaps under the 3/2 model dr**r(A(t)-ar)dt+cr2dZ. As well, approximate solutions are found for short-tenor inarrears caplets and floorlets under the same interest rate model. Comparisons are made of the approximate option values with those obtained with a computationally-intensive numerical scheme. The approximate pricing is found to be substantially fast and easy to implement, while the relative errors with respect to the “true” prices are very small.

Publication Date


  • 2015

Citation


  • Goard, J. (2015). In-arrears Interest Rate Derivatives under the 3/2 Model. Modern Economy, 6 (6), 707-716.

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/4556

Number Of Pages


  • 9

Start Page


  • 707

End Page


  • 716

Volume


  • 6

Issue


  • 6