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Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates

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  • Miltersen, Kristian R
  • Sandmann, Klaus
  • Sondermann, Dieter
Abstract
The authors derive a unified model that gives closed form solutions for caps and floors written on interest rates as well as puts and calls written on zero-coupon bonds. The crucial assumption is that simple interest rates over a fixed finite period that matches the contract, which the authors want to price, are log-normally distributed. Moreover, this assumption is shown to be consistent with the Heath-Jarrow-Morton model for a specific choice of volatility. Copyright 1997 by American Finance Association.

Suggested Citation

  • Miltersen, Kristian R & Sandmann, Klaus & Sondermann, Dieter, 1997. "Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates," Journal of Finance, American Finance Association, vol. 52(1), pages 409-430, March.
    • Handle: RePEc:bla:jfinan:v:52:y:1997:i:1:p:409-30
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