VALUATION OF FLOATING RANGE NOTES IN LÉVY TERM‐STRUCTURE MODELS

Ernst Eberlein and Wolfgang Kluge

Mathematical Finance, 2006, vol. 16, issue 2, 237-254

Abstract: Turnbull (1995) as well as Navatte and Quittard‐Pinon (1999) derived explicit pricing formulae for digital options and range notes in a one‐factor Gaussian Heath–Jarrow–Morton (henceforth HJM) model. Nunes (2004) extended their results to a multifactor Gaussian HJM framework. In this paper, we generalize these results by providing explicit pricing solutions for digital options and range notes in the multivariate Lévy term‐structure model of Eberlein and Raible (1999), that is, an HJM‐type model driven by a d‐dimensional (possibly nonhomogeneous) Lévy process. As a byproduct, we obtain a pricing formula for floating range notes in the special case of a multifactor Gaussian HJM model that is simpler than the one provided by Nunes (2004).

Date: 2006
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