Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates

We derive a unified model which gives closed form solutions for caps and floors written on interest rates as well as puts and calls written on zero-coupon bonds. The crucial assumption is that forward rates with a compounding period that matches the contract, which we want to price, is log-normally distributed. Moreover, this assumption is shown to be consistent with the Heath-Jarrow-Morton model for a specific choice of volatility.Log-normal, nominal-compounding rates, Heath-Jarrow- Morton model

Static Data Structure Lower Bounds Imply Rigidity

We show that static data structure lower bounds in the group (linear) model imply semi-explicit lower bounds on matrix rigidity. In particular, we prove that an explicit lower bound of $t \geq \omega(\log^2 n)$ on the cell-probe complexity of linear data structures in the group model, even against arbitrarily small linear space $(s= (1+\varepsilon)n)$, would already imply a semi-explicit ($\bf P^{NP}\rm$) construction of rigid matrices with significantly better parameters than the current state of art (Alon, Panigrahy and Yekhanin, 2009). Our results further assert that polynomial ($t\geq n^{\delta}$) data structure lower bounds against near-optimal space, would imply super-linear circuit lower bounds for log-depth linear circuits (a four-decade open question). In the succinct space regime $(s=n+o(n))$, we show that any improvement on current cell-probe lower bounds in the linear model would also imply new rigidity bounds. Our results rely on a new connection between the "inner" and "outer" dimensions of a matrix (Paturi and Pudlak, 2006), and on a new reduction from worst-case to average-case rigidity, which is of independent interest

The Complexity of Approximating a Trembling Hand Perfect Equilibrium of a Multi-player Game in Strategic Form

We consider the task of computing an approximation of a trembling hand perfect equilibrium for an n-player game in strategic form, n >= 3. We show that this task is complete for the complexity class FIXP_a. In particular, the task is polynomial time equivalent to the task of computing an approximation of a Nash equilibrium in strategic form games with three (or more) players.Comment: conference version to appear at SAGT'1

Commodity price modelling that matches current observables: a new approach

We develop a stochastic model of the spot commodity price and the spot convenience yield such that the model matches the current term structure of forward and futures prices, the current term structure of forward and futures volatilities, and the inter-temporal pattern of the volatility of the forward and futures prices. We let the underlying commodity price be a geometric Brownian motion and we let the spot convenience yield have a mean-reverting structure. The flexibility of the model, which makes it possible to simultaneously achieve all these goals, comes from allowing the volatility of the spot commodity price, the speed of mean-reversion parameter, the mean-reversion parameter, and the diffusion parameter of the spot convenience yield all to be time-varying deterministic functions.

Closed Form Term Structure Derivatives in a Heath-Jarrow- Morton Model with Log-Normal Annually Compounded Interest Rates

Starting with observable annually compounded forward rates we derive a term structure model of interest rates. The model relies upon the assumption that a specific set of annually compounded forward rates is log-normally distributed. We derive solutions for interest rate caps and floors as well as puts and calls written on zero-coupon bonds. In particular, for caplets with payment periods of same length as the compounding period (in our paper we have chosen one year, but it could be as well three or six months with quarterly or biannual compounding) we obtain the same Black formula as often used by market practioners, however, without making the unrealistic assumption that forward rates are independent of the accummulation process. Moreover, the log-normal assumption is shown to be consistent with the Heath-Jarrow-Morton model for a specific choice of volatility.Arbitrage, debt options, annually compounded rates, Heath-Jarrow- Morton model, option pricing, term structure of interest rates.