We consider an interest rate model with log-normally distributed rates in the terminal measure in discrete time. Such models are used in financial practice as parametric versions of the Markov functional model, or as approximations to the log-normal Libor market model. We show that the model has...

We derive the exact solution of a one-dimensional Markov functional model with log-normally distributed interest rates in discrete time. The model is shown to have two distinct limiting states, corresponding to small and asymptotically large volatilities, respectively. These volatility regimes...

The number of crossings of the implied volatility function with a fixed level is bounded above by the number of crossings of the risk-neutral density with the density of a log-normal distribution with the same mean as the forward price. It is bounded below by the number of convex payoffs priced...