In-Arrears Interest Rate Derivatives under the 3/2 Model - Modern Economy

ME > Vol.6 No.6, June 2015

In-Arrears Interest Rate Derivatives under the 3/2 Model ()

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DOI: 10.4236/me.2015.66067 3,654 Downloads 4,630 Views

Author(s)

Joanna Goard

Affiliation(s)

School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, Australia.

ABSTRACT

Lie symmetry methods are used to find a closed form solution for in-arrears swaps under the 3/2 model

. As well, approximate solutions are found for short-tenor in-arrears caplets and floorlets under the same interest rate model. Comparisons are made of the approximate option values with those obtained with a computationally-intensive numerical scheme. The approximate pricing is found to be substantially fast and easy to implement, while the relative errors with respect to the “true” prices are very small.

KEYWORDS

In-Arrears Swaps, Interest Rate Options, 3/2 Model

Share and Cite:

Goard, J. (2015) In-Arrears Interest Rate Derivatives under the 3/2 Model. Modern Economy, 6, 707-716. doi: 10.4236/me.2015.66067.

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