Interest Rate Digital Options and Range Notes

THE JOURNAL OF DERIVATIVES, Fall 1995

Posted: 22 Aug 1998

See all articles by Stuart M. Turnbull

Stuart M. Turnbull

University of Houston - C.T. Bauer College of Business

Abstract

A European interest rate digital call (put) option pays one dollar at maturity if the prespecified reference interest rate is above (below) the strike level, and zero otherwise. A European range digital option pays one dollar if the prespecified reference interest rate lies within a specified range at maturity, and zero otherwise. A range note is a form of floating-rate note. The payment at the end of each period is defined to equal the number of days the reference interest rate lies within a specified range times an interest rate specified at the start of each period. Taking the initial term structure to be exogenous, closed-form solutions are derived for European interest rate digital options, digital range options, and range notes.

JEL Classification: G15

Suggested Citation

Turnbull, Stuart M., Interest Rate Digital Options and Range Notes. THE JOURNAL OF DERIVATIVES, Fall 1995, Available at SSRN: https://ssrn.com/abstract=6915

Stuart M. Turnbull (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

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