Interest rate options valuation under incomplete information

Interest rate options valuation under incomplete information

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Article ID: iaor20073322
Country: Netherlands
Volume: 151
Issue: 1
Start Page Number: 99
End Page Number: 117
Publication Date: Apr 2007
Journal: Annals of Operations Research
Authors:
Keywords: financial, investment
Abstract:

This paper aims at examining the term structure of interest rates and European-type interest rate option prices in a partially observable economy. It extends the existing literature on incomplete information by developing a one-factor model which is consistent with the initial yield curve and by providing closed-form solutions for discount bonds and different kinds of options. The model of this paper encompasses Hull and White's model. Moreover, through a numerical example, these two models are compared and the impact of incomplete information on option prices is analysed.

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