Term Structure Movements Implicit in Asian Option Prices

48 Pages Posted: 21 Mar 2018

See all articles by Caio Almeida

Caio Almeida

Getulio Vargas Foundation ; Princeton University

Jose Vicente

Government of the Federative Republic of Brazil - Central Bank of Brazil; Ibmec, Rio de Janeiro - IBMEC Business School

Date Written: September 15, 2009

Abstract

In this paper we implement dynamic term structure models that adopt bonds and Asian options in the estimation process. The goal is to analyze the pricing and hedging implications of term structure movements when options are (or not) included in the estimation process. We analyze how options affect the shape, risk premium and hedging structure of the dynamic factors. We find that the inclusion of options affects the loadings of the slope and curvature factors, and considerably changes the risk premium and hedging structure of all dynamic factors.

Keywords: Dynamic term structure models, latent factors, bond risk premium, Asian option pricing

JEL Classification: C51, G12

Suggested Citation

Almeida, Caio and Vicente, Jose, Term Structure Movements Implicit in Asian Option Prices (September 15, 2009). Available at SSRN: https://ssrn.com/abstract=3142984 or http://dx.doi.org/10.2139/ssrn.3142984

Caio Almeida (Contact Author)

Getulio Vargas Foundation ( email )

Praia de Botafogo 190, 11o andar
Botafogo
Rio de Janeiro, Rio de Janeiro 22250-900
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5521-37995827 (Phone)
5521-2553-8821 (Fax)

HOME PAGE: http://www.fgv.br/professor/calmeida/

Princeton University ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

Jose Vicente

Government of the Federative Republic of Brazil - Central Bank of Brazil

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Ibmec, Rio de Janeiro - IBMEC Business School

SCN Quadra 2, Bloco A, 2nd. floor
Ed. Corporate Financial Center
Brasília, 707712-900
Brazil

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