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Interest rate option pricing with volatility humps

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  • Iyuan Chuang
  • Peter H. Ritchken

Abstract

A development of a simple model in which interest rate claims are priced in the Heath-Jarrow-Morton paradigm and so incorporate full information on the term structure. The volatility structure for forward rates is humped and includes as a special case the exponentially dampened volatility structure used in the generalized Vasicek model.

Suggested Citation

  • Iyuan Chuang & Peter H. Ritchken, 1997. "Interest rate option pricing with volatility humps," Working Papers (Old Series) 9714, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:9714
    DOI: 10.26509/frbc-wp-199714
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    References listed on IDEAS

    as
    1. R. Bhar & C. Chiarella, 1997. "Transformation of Heath?Jarrow?Morton models to Markovian systems," The European Journal of Finance, Taylor & Francis Journals, vol. 3(1), pages 1-26, March.
    2. Ho, Thomas S Y & Lee, Sang-bin, 1986. "Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-1029, December.
    3. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
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    Keywords

    Interest rates; options;

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