Liang, Cui.
2008. Investigation of Interest Rate
Derivatives by Quantum Finance. Doctoral Dissertation, NUS.
Interest rate derivatives are the largest
derivatives market in the world. In order to price different interest rate
derivatives, one needs to model the underlying forward interest rate. Quantum
finance developed by Baaquie is a framework to model non-trivial correlations
between forward interest rates with different maturities as a parsimonious
alternative to the existing interest rate theories in finance, in particular to
the HJM-model. Base on the Quantum Finance framework, we empirically studied
the Cap and Floor pricing, unlike Black's formula, the Quantum Finance formula
generates the market price to an accuracy better than 90%.Also for swaption,
the perturbation expansion formula generates the prices to an accuracy of about
95% and matches all the trends of the market. We also give a efficient
algorithm for pricing American option on interest rate based on lattice field
theory model.
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