On the valuation of compositions in Levy term structure models

Wolfgang Kluge and Antonis Papapantoleon

Quantitative Finance, 2009, vol. 9, issue 8, 951-959

Abstract: We derive explicit valuation formulae for an exotic path-dependent interest rate derivative, namely an option on the composition of LIBOR rates. The formulae are based on Fourier transform methods for option pricing. We consider two models for the evolution of interest rates: an HJM-type forward rate model and a LIBOR-type forward price model. Both models are driven by a time-inhomogeneous Levy process.

Keywords: Affine term structure models; Applied mathematical finance; Interest rate modelling; Levy process (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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DOI: 10.1080/14697680902849346

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