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Valuation Of Floating Range Notes In Lévy Term‐Structure Models

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  • Ernst Eberlein
  • Wolfgang Kluge

Abstract

Turnbull (1995) as well as Navatte and Quittard‐Pinon (1999) derived explicit pricing formulae for digital options and range notes in a one‐factor Gaussian Heath–Jarrow–Morton (henceforth HJM) model. Nunes (2004) extended their results to a multifactor Gaussian HJM framework. In this paper, we generalize these results by providing explicit pricing solutions for digital options and range notes in the multivariate Lévy term‐structure model of Eberlein and Raible (1999), that is, an HJM‐type model driven by a d‐dimensional (possibly nonhomogeneous) Lévy process. As a byproduct, we obtain a pricing formula for floating range notes in the special case of a multifactor Gaussian HJM model that is simpler than the one provided by Nunes (2004).

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  • Ernst Eberlein & Wolfgang Kluge, 2006. "Valuation Of Floating Range Notes In Lévy Term‐Structure Models," Mathematical Finance, Wiley Blackwell, vol. 16(2), pages 237-254, April.
    • Handle: RePEc:bla:mathfi:v:16:y:2006:i:2:p:237-254
    DOI: 10.1111/j.1467-9965.2006.00270.x
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    Cited by:

    1. Eckhard Platen & Stefan Tappe, 2011. "Affine Realizations for Levy Driven Interest Rate Models with Real-World Forward Rate Dynamics," Research Paper Series 289, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Eckhard Platen & Steffan Tappe, 2015. "Real-World Forward Rate Dynamics With Affine Realizations," Published Paper Series 2015-7, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Damir Filipovi'c & Stefan Tappe, 2019. "Existence of L\'evy term structure models," Papers 1907.03561, arXiv.org.
    4. Stefan Tappe, 2019. "Existence of affine realizations for L\'evy term structure models," Papers 1907.02363, arXiv.org.

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