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Interest rate options valuation under incomplete information

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Abstract

This paper aims at examining the term structure of interest rates and European-type interest rate option prices in a partially observable economy. It extends the existing literature on incomplete information by developing a one-factor model which is consistent with the initial yield curve and by providing closed-form solutions for discount bonds and different kinds of options. The model of this paper encompasses Hull and White’s (1990). Moreover, through a numerical example, these two models are compared and the impact of incomplete information on option prices is analysed.

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Authors and Affiliations

  1. University of Cergy-Pontoise, THEMA, 33, boulevard du Port, 95011, Cergy-Pontoise, Cedex, Paris

    Constantin Mellios

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  1. Constantin Mellios
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Correspondence to Constantin Mellios.

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This article was completed when the author was at the University of Cergy-Pontoise. He is now at the University of Paris 1 Panth éon-Sorbonne, PRISM, 17, rue de la Sorbonne, 75231 Paris Cedex 05. e-mail: constantin.mellios@univ-paris1.fr.

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Mellios, C. Interest rate options valuation under incomplete information. Ann Oper Res 151, 99–117 (2007). https://doi.org/10.1007/s10479-006-0128-2

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