Polynomial Algorithms for Pricing Path-Dependent Interest Rate Instruments

Ronald Hochreiter () and Georg Pflug ()

Computational Economics, 2006, vol. 28, issue 3, 309 pages

Abstract: In this paper we study algorithms for pricing of interest rate instruments using recombining tree (scenario lattice) interest models. The price is defined as expected discounted cash flow. If the cash-flow generated by the instrument depends on the full or partial history of interest rates (path-dependent contracts), then pricing algorithms are typically of exponential complexity. We show that for some models, including product form cash-flows, additive cash-flows, delayed cash-flows and limited path-dependent cash-flows, polynomial pricing algorithms exist. Copyright Springer Science + Business Media, Inc. 2006

Keywords: path-dependent financial instruments; pricing; interest rate models; recombining trees (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1007/s10614-006-9049-z

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