Please use this identifier to cite or link to this item: https://doi.org/10.1016/j.physa.2009.09.031
Title: Interest rates in quantum finance: Caps, swaptions and bond options
Authors: Baaquie, B.E. 
Keywords: Derivatives
Libor
Quantum finance
Issue Date: 15-Jan-2010
Citation: Baaquie, B.E. (2010-01-15). Interest rates in quantum finance: Caps, swaptions and bond options. Physica A: Statistical Mechanics and its Applications 389 (2) : 296-314. ScholarBank@NUS Repository. https://doi.org/10.1016/j.physa.2009.09.031
Abstract: The prices of the main interest rate options in the financial markets, derived from the Libor (London Interbank Overnight Rate), are studied in the quantum finance model of interest rates. The option prices show new features for the Libor Market Model arising from the fact that, in the quantum finance formulation, all the different Libor payments are coupled and (imperfectly) correlated. Black's caplet formula for quantum finance is given an exact path integral derivation. The coupon and zero coupon bond options as well as the Libor European and Asian swaptions are derived in the framework of quantum finance. The approximate Libor option prices are derived using the volatility expansion. The BGM-Jamshidian (Gatarek et al. (1996) [1], Jamshidian (1997) [2]) result for the Libor swaption prices is obtained as the limiting case when all the Libors are exactly correlated. A path integral derivation is given of the approximate BGM-Jamshidian approximate price. © 2009.
Source Title: Physica A: Statistical Mechanics and its Applications
URI: http://scholarbank.nus.edu.sg/handle/10635/96956
ISSN: 03784371
DOI: 10.1016/j.physa.2009.09.031
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