LIBOR reform: option pricing for compounded rates
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2021
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06 - Presentation
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Innsbruck
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Abstract
I present new analytical pricing formulae for derivatives of compounded rates. Since the announced replacement of LIBOR, the compounded overnight rate has become the new market standard for floating-rate loans and notes. Many contracts contain a zero-based floor. The compounded rate is a time average of a series of benchmark rates. Floors and caps on compounded rates are thus Asian types of options. I prove that even if the rate process is non-Gaussian, the Gaussian process is asymptotically the correct model for pricing derivatives due to Lyapunov's central limit theorem. The approximation's maximum mispricing is bounded by the Berry-Esseen inequality.
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27th Annual Meeting of the German Finance Association (DGF)
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30.09.2021
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02.10.2021
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English
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Yes
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Blöchlinger, A. (2021). LIBOR reform: option pricing for compounded rates. 27th Annual Meeting of the German Finance Association (DGF). https://irf.fhnw.ch/handle/11654/43119