We will present a model to compute a lower bound for the price of this option. The model, represented by a non-linear parabolic PDE, is implemented with finite elements in order to demonstrate the results with several derivatives from the European market.

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...

Starting with observable annually compounded forward rates we derive a term structure model of interest rates. The model relies upon the assumption that a specific set of annually compounded forward rates is log-normally distributed. We derive solutions for interest rate caps and floors as well...

In this paper the authors measure the risk attitudes of bond investors which can be revealed from settled market prices. They present an equilibrium model which focuses on the stochastic behavior of tastes in addition to the dynamics of investor beliefs.

State price density (SPD) contains important information concerning market expectations. In existing literature, a constrained estimator of the SPD is found by nonlinear least squares in a suitable Sobolev space...

The binomial model has been used to price a wide variety of equity and interest rateoptions for more than two decades. Originally developed by Cox, Ross, and Rubinsteinto clarify the basic pricing principle of its continuous-time counterpart with reduced mathematicalrequirements, the approach...

In the past decades several versions of the binomial model for option pricing, originallyintroduced by COX, ROSS, AND RUBINSTEIN, have been discussed in the financeliterature. Some of these approaches model an arbitrage-free market in the discrete setupwhereas others attain this property only in...

This paper discusses the pitfalls in the pricing of barrier options using approximations of the underlying continuous processes via discrete lattice models. These problems are studied first in a Black-Scholes model. Improvements result from a trinomial model and a further modified model where...

This paper constructs a model for the evolution of a risky security that is consistent with a set of observed call option prices. It explicitly treats the fact that only a discrete data set can be observed in practice. The framework is general and allows for state dependent volatility and jumps....

This paper examines the relative information shares of the Bund, i.e. the ten-year Euro bondfuture contract on German sovereign debt, versus two futures with shorter maturity. We findthat the Bund is most important but does not dominate price discovery. The other contractsalso have relevant –...