In this paper, we establish a market model for the term structure of forward inflation rates based on the risk-neutral dynamics of nominal and real zero-coupon bonds. Under the market model, we can price inflation caplets as well as inflation swaptions with a formula similar to the Black's...

Convertible bonds and American warrants commonly contain the provision of the callable feature which allows the issuer to buy back the derivative at a predetermined recall price. Upon recall, by virtue of the early exercise privilege embedded in an American style derivative, the holder may...

In this paper we study a correlation-based LIBOR market model with a square-root volatility process. This model captures downward volatility skews through taking negative correlations between forward rates and the multiplier. An approximate pricing formula is developed for swaptions, and the...

This paper is concerned with option pricing in an incomplete market driven by a jump-diffusion process. We price options according to the principle of utility indifference. Our main contribution is an efficient multi-nomial tree method for computing the utility indifference prices for both...

In this paper we study a LIBOR market model with a volatility multiplier, which follows a square-root process. This model captures downward volatility skews through using negative correlations between forward rates and the multiplier. Approximate pricing formula is developed for swaptions, and...

In existing pricing theories, pricing of single-name credit default swaps and their options makes no reference of the market of defaultable bonds. This situation can cause price inefficiency and even generate arbitrage opportunities across the markets. In this paper, we introduce a new theory...

In an incomplete market, option prices depend on investors' utility functions. In this paper, we establish the connection between risk preference and optimal hedging strategy, and price options according to the principle of utility indifference. Taking the exponential utility function, we...