Estimation of bid-ask prices for options on LIBOR based instruments

Masimba Energy Sonono and Hopolang Phillip Mashele

Finance Research Letters, 2016, vol. 19, issue C, 33-41

Abstract: Interest rate options are the most liquid traded derivatives in the markets. We observe the following from the markets: (i) Market dealers usually quote the mid-price. The mid-price is a subjective and hypothetical price. (ii) OTC interest rate options market are incomplete, and options cannot always be costlessly replicated. (iii) The bid-ask prices are not widely available for the market as a whole. With these observations in mind, we propose an approach to estimate the bid-ask prices for options on LIBOR based instruments. In particular, we assess the proposed approach in the determination of premiums for caps and floors.

Keywords: Interest rate; LIBOR; Caps; Floors; Bid-ask prices; Wang transform (search for similar items in EconPapers)
JEL-codes: C02 C15 C63 G12 G23 G32 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:19:y:2016:i:c:p:33-41

DOI: 10.1016/j.frl.2016.05.013

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