Please use this identifier to cite or link to this item: https://doi.org/10.1142/S0219024905003347
Title: A common market measure for LIBOR and pricing caps, floors and swaps in a field theory of forward interest rates
Authors: Baaquie, B.E. 
Keywords: Caps
Field theory
LIBOR
Numeraire
Swaps
Issue Date: Dec-2005
Citation: Baaquie, B.E. (2005-12). A common market measure for LIBOR and pricing caps, floors and swaps in a field theory of forward interest rates. International Journal of Theoretical and Applied Finance 8 (8) : 999-1018. ScholarBank@NUS Repository. https://doi.org/10.1142/S0219024905003347
Abstract: The main result of this paper is that a martingale evolution can be chosen for LIBOR such that, by appropriately fixing the drift, all LIBOR interest rates have a common market measure. LIBOR is described using a quantum field theory model, and a common measure is seen to emerge naturally for such models. To elaborate how the martingale for the LIBOR belongs to the general class of numeraires for the forward interest rates, two other numeraires are considered, namely the money market measure that makes the evolution of the zero coupon bonds a martingale, and the forward measure for which the forward bond price is a martingale. The price of an interest rate cap is computed for all three numeraires, and is shown to be numeraire invariant. Put-call parity is discussed in some detail and shown to emerge due to some nontrivial properties of the numeraires. Some properties of swaps, and their relation to caps and floors, are briefly discussed. © World Scientific Publishing Company.
Source Title: International Journal of Theoretical and Applied Finance
URI: http://scholarbank.nus.edu.sg/handle/10635/98996
ISSN: 02190249
DOI: 10.1142/S0219024905003347
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