The Paradigm Interest Rate Option Problem

Carl Chiarella, Xuezhong (Tony) He () and Christina Sklibosios Nikitopoulos
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Christina Sklibosios Nikitopoulos: University of Technology Sydney

Chapter Chapter 21 in Derivative Security Pricing, 2015, pp 431-437 from Springer

Abstract: Abstract There are a number of instruments in interest rate markets that are equivalent to an option on an interest rate or an option on a bond. In this chapter we focus on the interest rate caps, which are call options on an interest rate. We show that they can be interpreted as a put option on a bond. The problem of pricing such bonds, and hence the interest rate cap, shall motivate much of the discussion in subsequent chapters. In the last section we briefly discuss the issues associated with the interest rate option problem that distinguish it from the option pricing problem in a world of deterministic interest rates.

Keywords: Interest Rate; Call Option; Market Rate; Strike Price; Hedging Portfolio (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:dymchp:978-3-662-45906-5_21

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DOI: 10.1007/978-3-662-45906-5_21

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