IDEAS home Printed from https://ideas.repec.org/p/arx/papers/cond-mat-9812318.html
   My bibliography  Save this paper

Using path integrals to price interest rate derivatives

Author

Listed:
  • Matthias Otto

    (Institute of Theoretical Physics, University of Goettingen, Germany)

Abstract

We present a new approach for the pricing of interest rate derivatives which allows a direct computation of option premiums without deriving a (Black-Scholes type) partial differential equation and without explicitly solving the stochastic process for the underlying variable. The approach is tested by rederiving the prices of a zero bond and a zero bond option for a short rate environment which is governed by Vasicek dynamics. Furthermore, a generalization of the method to general short rate models is outlined. In the case, where analytical solutions are not accessible, numerical implementations of the path integral method in terms of lattice calculations as well as path integral Monte Carlo simulations are possible.

Suggested Citation

  • Matthias Otto, 1998. "Using path integrals to price interest rate derivatives," Papers cond-mat/9812318, arXiv.org, revised Jun 1999.
    • Handle: RePEc:arx:papers:cond-mat/9812318
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/cond-mat/9812318
    File Function: Latest version
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhang, Kun & Liu, Jing & Wang, Erkang & Wang, Jin, 2017. "Quantifying risks with exact analytical solutions of derivative pricing distribution," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 471(C), pages 757-766.
    2. Bustamante, M. & Contreras, M., 2016. "Multi-asset Black–Scholes model as a variable second class constrained dynamical system," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 457(C), pages 540-572.
    3. Contreras, Mauricio & Pellicer, Rely & Villena, Marcelo, 2017. "Dynamic optimization and its relation to classical and quantum constrained systems," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 479(C), pages 12-25.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:cond-mat/9812318. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.