Please use this identifier to cite or link to this item:
|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
|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|
|Appears in Collections:||Staff Publications|
Show full item record
Files in This Item:
There are no files associated with this item.
checked on Jul 8, 2020
WEB OF SCIENCETM
checked on Jul 1, 2020
checked on Jun 27, 2020
Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.