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

Kristian R Miltersen, Klaus Sandmann and Dieter Sondermann

Journal of Finance, 1997, vol. 52, issue 1, 409-30

Abstract: The authors derive a unified model that 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 simple interest rates over a fixed finite period that matches the contract, which the authors want to price, are log-normally distributed. Moreover, this assumption is shown to be consistent with the Heath-Jarrow-Morton model for a specific choice of volatility. Copyright 1997 by American Finance Association.

Date: 1997
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