On the valuation of compositions in Lévy term structure models

Details On the valuation of compositions in Lévy term structure models On the valuation of compositions in Lévy term structure models

2009-02-19

arxiv.org/abs/0902.3456v1

Quantitative Finance 2009, Vol. 9, No. 8, 951-959

Economy

Quantitative Finance

Pricing of Securities

17 pages, 2 figures, to appear in Quant. Finance

Scientific paper

We derive explicit valuation formulae for an exotic path-dependent interest rate derivative, namely an option on the composition of LIBOR rates. The formulae are based on Fourier transform methods for option pricing. We consider two models for the evolution of interest rates: an HJM-type forward rate model and a LIBOR-type forward price model. Both models are driven by a time-inhomogeneous L\'evy process.

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