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Overnight Indexed Swaps and Floored Compounded Instrument in HJM One-Factor Model

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  • Marc Henrard

    (Bank for International Settlements)

Abstract

Two types of financial instruments including (overnight) compounding are studied in this note. The first one is overnight compounded instruments in the case where the settlement is delayed with respect to the end of the compounding period (floating leg of the OIS). The second is options on the composition. In both cases we study both continuous and discrete composition. We provide explicit formulas within the HJM one-factor models with deterministic volatility together with hedging strategies.

Suggested Citation

  • Marc Henrard, 2004. "Overnight Indexed Swaps and Floored Compounded Instrument in HJM One-Factor Model," Finance 0402008, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0402008
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0402/0402008.pdf
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    References listed on IDEAS

    as
    1. Marc Henrard, 2003. "Explicit bond option and swaption formula in Heath-Jarrow-Morton one factor model," Finance 0310009, University Library of Munich, Germany.
    2. Marc Henrard, 2003. "Explicit Bond Option Formula In Heath–Jarrow–Morton One Factor Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 57-72.
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    Cited by:

    1. Sander Willems, 2020. "SABR smiles for RFR caplets," Papers 2004.04501, arXiv.org, revised May 2020.
    2. Henrard, Marc, 2007. "The irony in the derivatives discounting," MPRA Paper 3115, University Library of Munich, Germany.
    3. Marc Pierre Henrard, 2019. "LIBOR Fallback and Quantitative Finance," Risks, MDPI, vol. 7(3), pages 1-15, August.
    4. Claudio Fontana, 2022. "Caplet pricing in affine models for alternative risk-free rates," Papers 2202.09116, arXiv.org, revised Jan 2023.

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    More about this item

    Keywords

    Overnight indexed swaps; option on OIS; Asian option; compounded average; explicit formula; HJM model; one factor model; hedging;
    All these keywords.

    JEL classification:

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

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