Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates
Posted: 17 May 2006
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: G13
Suggested Citation: Suggested Citation