Interest rate options close to expiry

Ghada Alobaidi; Roland Mallier

doi:10.55937/sut/1100200016

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Home > Journals > SUT J. Math. > Volume 40 > Issue 1 > Article

January 2004 Interest rate options close to expiry

Ghada Alobaidi, Roland Mallier

Author Affiliations +

Ghada Alobaidi,¹ Roland Mallier²
¹Department of Mathematics, American University of Sharjah United Arab Emirates
²Department of Applied Mathematics, University of Western Ontario London ON N6A 5B7 Canada

SUT J. Math. 40(1): 13-40 (January 2004). DOI: 10.55937/sut/1100200016

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Abstract

We use an asymptotic expansion to study the behavior of American-style interest rate caplets and floorlets close to expiry, under the assumption that interest rates obey a mean-reverting random walk as given by the Vasicek model. Series solutions are obtained for the location of the free boundary and the price of the option for both the caplet and floorlet.

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Ghada Alobaidi. Roland Mallier. "Interest rate options close to expiry." SUT J. Math. 40 (1) 13 - 40, January 2004. https://doi.org/10.55937/sut/1100200016