Pricing swaptions and zero-coupon futures options under the discrete-time arbitrage-free Nelson–Siegel model

Frédéric Godin (), Ramin Eghbalzadeh () and Patrice Gaillardetz ()
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Frédéric Godin: Concordia University
Ramin Eghbalzadeh: Concordia University
Patrice Gaillardetz: Concordia University

Review of Derivatives Research, 2023, vol. 26, issue 2, No 2, 206 pages

Abstract: Abstract The paper outlines pricing procedures for several interest rate derivatives under the discrete-time arbitrage-free Nelson–Siegel (DTAFNS) model of Eghbalzadeh et al. (The discrete-time arbitrage-free Nelson–Siegel model: a closed-form solution and applications to mixed funds representation, 2022). Derivatives considered include swaptions, zero-coupon futures, and options on such futures. Formulas for expected excess returns are also provided for options on futures. Whereas swaption pricing relies on Monte-Carlo simulation, closed-form formulas are obtained for all other derivatives.

Keywords: Interest rate derivatives; Swaptions; Options on futures; Option premium; Option excess returns; Discrete-time arbitrage-free Nelson–Siegel model (search for similar items in EconPapers)
JEL-codes: E43 G13 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11147-023-09196-4

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