Caplet Pricing in Affine Models for Alternative Risk-Free Rates

19 Pages Posted: 15 Mar 2022 Last revised: 23 Jan 2023

See all articles by Claudio Fontana

Claudio Fontana

University of Padova, Department of Mathematics

Date Written: January 23, 2023

Abstract

Alternative risk-free rates (RFRs) play a central role in the reform of interest rate benchmarks. We study a model for RFRs driven by a general affine process. Under minimal assumptions, we derive explicit valuation formulas for forward-looking and backward-looking caplets/floorlets, term-basis caplets as well as 1-month and 3-month RFR futures contracts.

Keywords: Risk-free rate, Libor reform, backward-looking rate, overnight rate, affine process, Fourier pricing

JEL Classification: C02, C60, E43, G12, G13

Suggested Citation

Fontana, Claudio, Caplet Pricing in Affine Models for Alternative Risk-Free Rates (January 23, 2023). Available at SSRN: https://ssrn.com/abstract=4038165 or http://dx.doi.org/10.2139/ssrn.4038165

Claudio Fontana (Contact Author)

University of Padova, Department of Mathematics ( email )

Via Trieste 63
Padova, 35121
Italy

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