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Implied interest rate pricing models

Author

Listed:
  • J.E. Kennedy

    (Department of Statistics, University of Oxford, 1 South Parks Road, Oxford OX1 3TG, UK Manuscript)

  • P.J. Hunt

    (ABN-AMRO Bank, Structured Products Group, 199 Bishopsgate, London EC2M 3TY, UK)

Abstract

We show how market prices for standard interest rate products can be used, under the assumption of a one-factor model, to imply the joint distribution of zero coupon bonds of differing maturities at a fixed date $T$ in the future. We relate these results to the solution of an optimisation problem arising in the pricing of amortising swaptions. Finally, we apply these ideas to price (and hedge) products of importance in the interest rate derivatives market.

Suggested Citation

  • J.E. Kennedy & P.J. Hunt, 1998. "Implied interest rate pricing models," Finance and Stochastics, Springer, vol. 2(3), pages 275-293.
    • Handle: RePEc:spr:finsto:v:2:y:1998:i:3:p:275-293
    Note: received: March 1997; final version received: May 1997
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    Citations

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    Cited by:

    1. Marek Rutkowski, 1999. "Models of forward Libor and swap rates," Applied Mathematical Finance, Taylor & Francis Journals, vol. 6(1), pages 29-60.
    2. Joanne Kennedy & Phil Hunt & Antoon Pelsser, 2000. "Markov-functional interest rate models," Finance and Stochastics, Springer, vol. 4(4), pages 391-408.

    More about this item

    Keywords

    Interest rate models; swaptions;

    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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