Caplet pricing in affine models for alternative risk-free rates

Abstract

Alternative risk-free rates (RFRs) play a central role in the reform of interest rate benchmarks. We study a model for RFRs driven by a general affine process. Under minimal assumptions, we derive explicit valuation formulas for forward-looking and backward-looking caplets/floorlets, term-basis caplets as well as 1-month and 3-month RFR futures contracts.

arXiv comment19 pages (a shortened version is forthcoming in SIAM J. Financ. Math.)