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The Pricing of Default-Free Interest Rate Cap, Floor, and Collar Agreements

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  • Briys, Eric
  • Crouhy, Michel
  • Schobel, Rainer

Abstract

This paper focuses on the valuation of caps, floors, and collars in a contingent claim framework under continuous time. These instruments are interpreted as options on traded zero coupon bonds. The bond prices themselves are used as the underlying stochastic variables. This has the advantage that the authors end up with closed-form solutions that are easy to compute. Special attention is devoted to the choice of the stochastic process appropriate for the price dynamics of the underlying zero coupon bonds. Copyright 1991 by American Finance Association.

Suggested Citation

  • Briys, Eric & Crouhy, Michel & Schobel, Rainer, 1991. "The Pricing of Default-Free Interest Rate Cap, Floor, and Collar Agreements," Journal of Finance, American Finance Association, vol. 46(5), pages 1879-1892, December.
    • Handle: RePEc:bla:jfinan:v:46:y:1991:i:5:p:1879-92
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    Cited by:

    1. J.J. Prescott & Kathryn E. Spier & Albert Yoon, 2014. "Trial and Settlement: A Study of High-Low Agreements," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 699-746.
    2. J.J. Prescott & Kathryn E. Spier & Albert Yoon, 2014. "Trial and Settlement: A Study of High-Low Agreements," NBER Working Papers 19873, National Bureau of Economic Research, Inc.
    3. Jean-Paul Décamps, 1993. "Valorisation de produits obligataires dans un modéle d'équilibre général en temps discret," Annals of Economics and Statistics, GENES, issue 31, pages 73-100.
    4. K. Nawalkha, Sanjay, 1995. "Face value convergence for stochastic bond price processes: a note on Merton's partial equilibrium option pricing model," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 153-164, April.
    5. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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