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

Joanna Goard

School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, Australia.

DOI: 10.4236/me.2015.66067                

Abstract

Lie symmetry methods are used to find a closed form solution for in-arrears swaps under the 3/2 model . As well, approximate solutions are found for short-tenor in-arrears 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.

Keywords

In-Arrears Swaps, Interest Rate Options, 3/2 Model

Conflicts of Interest

The authors declare no conflicts of interest.

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