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|Title:||Feynman perturbation expansion for the price of coupon bond options and swaptions in quantum finance. I. Theory||Authors:||Baaquie, B.E.||Issue Date:||2007||Citation:||Baaquie, B.E. (2007). Feynman perturbation expansion for the price of coupon bond options and swaptions in quantum finance. I. Theory. Physical Review E - Statistical, Nonlinear, and Soft Matter Physics 75 (1) : -. ScholarBank@NUS Repository. https://doi.org/10.1103/PhysRevE.75.016703||Abstract:||European options on coupon bonds are studied in a quantum field theory model of forward interest rates. Swaptions are briefly reviewed. An approximation scheme for the coupon bond option price is developed based on the fact that the volatility of the forward interest rates is a small quantity. The field theory for the forward interest rates is Gaussian, but when the payoff function for the coupon bond option is included it makes the field theory nonlocal and nonlinear. A perturbation expansion using Feynman diagrams gives a closed form approximation for the price of coupon bond option. A special case of the approximate bond option is shown to yield the industry standard one-factor HJM formula with exponential volatility. © 2007 The American Physical Society.||Source Title:||Physical Review E - Statistical, Nonlinear, and Soft Matter Physics||URI:||http://scholarbank.nus.edu.sg/handle/10635/96622||ISSN:||15393755||DOI:||10.1103/PhysRevE.75.016703|
|Appears in Collections:||Staff Publications|
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