ME  Vol.6 No.6 , June 2015
In-Arrears Interest Rate Derivatives under the 3/2 Model
Author(s) Joanna Goard
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.

Cite this paper
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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