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Interest Rate, Currency and Equity Derivatives Valuation Using the Potential Approach

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  • Naosuke Nakamura
  • Fan Yu

Abstract

Based on the potential approach to interest rate modelling, we introduce a simple tractable model for the unified valuation of interest rate, currency and equity derivatives. Our model is able to accommodate the initial term structure of zero‐coupon bond prices, generate positive and bounded interest rates, and handle cross products such as differential swaps, quanto options and equity swaps. As our model is specified under the actual probability measure, it can be directly used for portfolio risk management and the computation of value at risk. Furthermore, our model yields simple analytical formulas that are easy to calibrate and implement.

Suggested Citation

  • Naosuke Nakamura & Fan Yu, 2000. "Interest Rate, Currency and Equity Derivatives Valuation Using the Potential Approach," International Review of Finance, International Review of Finance Ltd., vol. 1(4), pages 269-294, December.
    • Handle: RePEc:bla:irvfin:v:1:y:2000:i:4:p:269-294
    DOI: 10.1111/1468-2443.00019
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    Cited by:

    1. T. Kluge & L. C. G. Rogers, 2018. "The Potential Approach In Practice," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(03), pages 1-30, May.
    2. The Anh Nguyen & Frank Thomas Seifried, 2015. "The Multi-Curve Potential Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(07), pages 1-32, November.
    3. Matheus R Grasselli & Tsunehiro Tsujimoto, 2011. "Calibration of Chaotic Models for Interest Rates," Papers 1106.2478, arXiv.org.

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