Implied Volatilities for Options on Backward-Looking Term Rates
18 Pages Posted: 12 Jun 2020
Date Written: May 5, 2020
We derive valuation formulas for caps and floors on backward-looking term rates in the Black-1976, Bachelier and Hull-White-1-Factor models explicitly regarding valuation in the fixing period, extending and detailing results of [Lyashenko & Mercurio 2019, Henrard 2019, Turfus 2020]. These formulae facilitate us to provide a consistent definition for implied volatility on backward-looking term rates.
Keywords: IBOR Replacement, RFR, SOFR, Market Model, Forward Rates, Hull-White Model
JEL Classification: C22, C60, G12, G13
Suggested Citation: Suggested Citation