Abstract
This chapter presents the Heath–Jarrow–Morton (HJM) (Heath et al, Econometrica 60(1):77–105, 1992) model for pricing interest rate derivatives. Given frictionless and competitive markets, and assuming a complete market, this is the most general arbitrage-free pricing model possible with a stochastic term structure of interest rates. This model, with appropriate modifications, can also be used to price derivatives whose values depend on a term structure of underlying assets, examples include exotic equity derivatives where the underlyings are call and put options, commodity options where the underlyings are futures prices, and credit derivatives where the underlyings are risky zero-coupon bond prices.
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Jarrow, R.A. (2018). The Heath–Jarrow–Morton Model. In: Continuous-Time Asset Pricing Theory. Springer Finance(). Springer, Cham. https://doi.org/10.1007/978-3-319-77821-1_6
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