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Pricing swaptions and zero-coupon futures options under the discrete-time arbitrage-free Nelson–Siegel model

Author

Listed:
  • Frédéric Godin

    (Concordia University
    Centre de Recherches Mathématiques)

  • Ramin Eghbalzadeh

    (Concordia University)

  • Patrice Gaillardetz

    (Concordia University
    Centre de Recherches Mathématiques)

Abstract

The paper outlines pricing procedures for several interest rate derivatives under the discrete-time arbitrage-free Nelson–Siegel (DTAFNS) model of Eghbalzadeh et al. (The discrete-time arbitrage-free Nelson–Siegel model: a closed-form solution and applications to mixed funds representation, 2022). Derivatives considered include swaptions, zero-coupon futures, and options on such futures. Formulas for expected excess returns are also provided for options on futures. Whereas swaption pricing relies on Monte-Carlo simulation, closed-form formulas are obtained for all other derivatives.

Suggested Citation

  • Frédéric Godin & Ramin Eghbalzadeh & Patrice Gaillardetz, 2023. "Pricing swaptions and zero-coupon futures options under the discrete-time arbitrage-free Nelson–Siegel model," Review of Derivatives Research, Springer, vol. 26(2), pages 171-206, October.
    • Handle: RePEc:kap:revdev:v:26:y:2023:i:2:d:10.1007_s11147-023-09196-4
    DOI: 10.1007/s11147-023-09196-4
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    References listed on IDEAS

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    1. David F. Schrager & Antoon A. J. Pelsser, 2006. "Pricing Swaptions And Coupon Bond Options In Affine Term Structure Models," Mathematical Finance, Wiley Blackwell, vol. 16(4), pages 673-694, October.
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    More about this item

    Keywords

    Interest rate derivatives; Swaptions; Options on futures; Option premium; Option excess returns; Discrete-time arbitrage-free Nelson–Siegel model;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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