On the valuation of compositions in Lévy term structure models
arXiv:0902.3456
Abstract
We derive explicit valuation formulae for an exotic path-dependent interest rate derivative, namely an option on the composition of LIBOR rates. The formulae are based on Fourier transform methods for option pricing. We consider two models for the evolution of interest rates: an HJM-type forward rate model and a LIBOR-type forward price model. Both models are driven by a time-inhomogeneous Lévy process.
17 pages, 2 figures, to appear in Quant. Finance