1,006 research outputs found
A Common Market Measure for Libor and Pricing Caps, Floors and Swaps in a Field Theory of Forward Interest Rates
The main result of this paper that a martingale evolution can be chosen for
Libor such that all the Libor interest rates have a common market measure; the
drift is fixed such that each Libor has the martingale property. Libor is
described using a field theory model, and a common measure is seen to be emerge
naturally for such models. To elaborate how the martingale for the Libor
belongs to the general class of numeraire for the forward interest rates, two
other numeraire's are considered, namely the money market measure that makes
the evolution of the zero coupon bonds a martingale, and the forward measure
for which the forward bond price is a martingale. The price of an interest rate
cap is computed for all three numeraires, and is shown to be numeraire
invariant. Put-call parity is discussed in some detail and shown to emerge due
to some non-trivial properties of the numeraires. Some properties of swaps, and
their relation to caps and floors, are briefly discussed.Comment: 28 pages, 4 figure
Pricing Options On Risky Assets In A Stochastic Interest Rate Economy 1
Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/73150/1/j.1467-9965.1992.tb00030.x.pd
Local time and the pricing of time-dependent barrier options
A time-dependent double-barrier option is a derivative security that delivers
the terminal value at expiry if neither of the continuous
time-dependent barriers b_\pm:[0,T]\to \RR_+ have been hit during the time
interval . Using a probabilistic approach we obtain a decomposition of
the barrier option price into the corresponding European option price minus the
barrier premium for a wide class of payoff functions , barrier functions
and linear diffusions . We show that the barrier
premium can be expressed as a sum of integrals along the barriers of
the option's deltas \Delta_\pm:[0,T]\to\RR at the barriers and that the pair
of functions solves a system of Volterra integral
equations of the first kind. We find a semi-analytic solution for this system
in the case of constant double barriers and briefly discus a numerical
algorithm for the time-dependent case.Comment: 32 pages, to appear in Finance and Stochastic
Measuring and managing liquidity risk in the Hungarian practice
The crisis that unfolded in 2007/2008 turned the attention of the financial world toward liquidity, the lack of which caused substantial losses. As a result, the need arose for the traditional financial models to be extended with liquidity. Our goal is to discover how
Hungarian market players relate to liquidity. Our results are obtained through a series of semistructured
interviews, and are hoped to be a starting point for extending the existing models in an appropriate way. Our main results show that different investor groups can be identified along their approaches to liquidity, and they rarely use sophisticated models to measure and manage liquidity. We conclude that although market players would have access to complex liquidity measurement and management tools, there is a limited need for these, because the currently available models are unable to use complex liquidity information effectively
Recommended from our members
Efficient pricing of ratchet equity-indexed annuities in a variance-gamma economy
In this paper we propose a new method for approximating the price of arithmetic Asian options in a Variance-Gamma (VG) economy, which is then applied to the problem of pricing equityindexed annuity contracts. The proposed procedure is an extension to the case of a VG-based model of the moment-matching method developed by Turnbull and Wakeman and Levy for the pricing of this class of path-dependent options in the traditional Black-Scholes setting. The accuracy of the approximation is analyzed against RQMC estimates for the case of ratchet equityindexed annuities with index averaging
- …