Consider the time-t value of the LIBOR-in-arrears payment [see (8.3.14a,b)], show that where C j (t; T

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Consider the time-t value of the LIBOR-in-arrears payment [see (8.3.14a,b)], show that

VL(t) = B(t, Tj) E'; [aj +Lj (T;)] = j Lj(t) + + 2ajaj+1Cj (t; Tj, Tj+1, X) DX,

where C_j (t; T_j ,T_j₊₁,X) is the time-t value of the caplet with strike X, resetting at T_j and paying max(L_j (T_j) − X, 0) at T_j+1.

For any twice-differentiable function V (y) defined for y ≥ 0, we have

V(y) = V(0) +yV'(0) + fo V" (X) max (y - X, 0) dx.

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Mathematical Models Of Financial Derivative

ISBN: 9783642447938

2nd Edition

Authors: Yue-Kuen Kwok

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Question Posted: Nov 30, 2023 07:31 AM

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Consider the time-t value of the LIBOR-in-arrears payment [see (8.3.14a,b)], show that where C j (t; T

Question:

VL(t) = B(t, Tj) E'; [aj +¹Lj (T;)] = αj Lj(t) + + √°° 2ajaj+1Cj (t; Tj, Tj+1, X) DX,

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To derive the expression for the timet value of the LIBORinarrears payment lets consider the definit...View the full answer

Mathematical Models Of Financial Derivative

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