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.
Chan, K., Karolyi, A., Longstaff, F. and Sanders, A. (1992) Empirical Comparison of Alternate Models of the Short-Term Interest Rate. Journal of Finance, 47, 1209-1227. http://dx.doi.org/10.1111/j.1540-6261.1992.tb04011.x
Goard, J.M. and Hansen, N. (2004) Comparison of the Performance of a Time-Dependent Short-Interest Rate Model with Time-Dependent Models. Applied Mathematical Finance, 11, 147-164.