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In-Arrears Interest Rate Derivatives under the 3/2 Model

DOI: 10.4236/me.2015.66067, PP. 707-716

Keywords: In-Arrears Swaps, Interest Rate Options, 3/2 Model

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Abstract:

Lie symmetry methods are used to find a closed form solution for in-arrears swaps under the 3/2 model \"\". As well, approximate solutions are found for short-tenor in-arrears caplets and floorlets under the same interest rate model. Comparisons are made of the approximate option values with those obtained with a computationally-intensive numerical scheme. The approximate pricing is found to be substantially fast and easy to implement, while the relative errors with respect to the “true” prices are very small.

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