A tractable market model with jumps for pricing short-term interest rate derivatives

Y. Samuelides and E. Nahum

Quantitative Finance, 2001, vol. 1, issue 2, 270-283

Abstract: Short-term interest rate derivatives present a few unresolved problems. It is not obvious which pricing model to use, and the usual Heath-Jarrow-Morton type models seem insufficient to describe the risk they entail. Moreover, the hedging process is fairly delicate as the liquidity of short-term products cannot always be relied upon. In this paper, we justify the use of a market model with jumps to price these products. The main advantage of this approach is two fold. First, we will show how realistic such a model proves to be. Then, using justified approximations, the market model with jumps is made very tractable. Finally, the hedging issue is resolved by describing a dynamic delta-hedging strategy provided by the model in addition to a static vega-hedging strategy designed to use the relevant liquid products at the trader's disposal.

Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1088/1469-7688/1/2/309 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:1:y:2001:i:2:p:270-283

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1088/1469-7688/1/2/309

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().