TITLE:
In-Arrears Interest Rate Derivatives under the 3/2 Model
AUTHORS:
Joanna Goard
KEYWORDS:
In-Arrears Swaps, Interest Rate Options, 3/2 Model
JOURNAL NAME:
Modern Economy,
Vol.6 No.6,
June
18,
2015
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.