| Article ID: | iaor2008564 |
| Country: | United Kingdom |
| Volume: | 15 |
| Issue: | 3 |
| Start Page Number: | 243 |
| End Page Number: | 252 |
| Publication Date: | Jul 2004 |
| Journal: | IMA Journal of Management Mathematics (Print) |
| Authors: | Mamon Rogemar S. |
| Keywords: | markov processes |
An interest rate process assumed as a function of a continuous-time finite-state Markov chain representing the ‘state of economy’ is considered. Within this framework, the dynamics of the expected value of the Markov chain process under the forward measure are calculated and used to obtain explicit expressions for the price of bond options, caps, floors and cap yields.