Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates
Kristian R. Miltersen
Copenhagen Business School
University of Bonn - The Bonn Graduate School of Economics
University of Bonn - Institute of Statistics
The Journal of Finance, Vol. 52, pp. 409-430, 1997
We derive a unified model which gives closed form solutions for caps and floors written on interest rates as well as puts and calls written on zero-coupon bonds. The crucial assumption is that forward rates with a compounding period that matches the contract, which we want to price, is log normally distributed. Moreover, this assumption is shown to be consistent with the Heath-Jarrow-Morton model for a specific choice of volatility.
Keywords: LIBOR Market, Black Formular
JEL Classification: G13Accepted Paper Series
Date posted: May 17, 2006
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