When an index amortizating rate swap has a lockout period for the first year, we must solve

with jump condition

where

g(r, i) =1 if ti < 1,

and with final condition

V(r, P, T ) = (r − rf )P.

In this case, reduce the order of the problem using a similarity reduction of the form
V(r, P, t) = PH(r, t).

Transcribed Image Text:

av av + (u – Aw) - rV = 0, ar at ar2