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Valuation of interest rate ceiling and floor in uncertain financial market

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Abstract

The interest rate ceiling and floor are the popular interest rate derivatives in a financial market. In this paper, the valuation of interest rate ceiling and floor is investigated by using uncertainty theory. Different from the classical stochastic interest rate models, the uncertain interest rate model is used in this paper as the basis of evaluating the interest rate ceiling and floor. Based on the assumption that the short interest rate follows uncertain differential equations, the price formulas of interest rate ceiling and floor are derived.

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Acknowledgments

Professor Ralescu’s work was supported by a Taft Travel Grant for Research.

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Authors and Affiliations

  1. School of Economics and Management, Shanxi University, Taiyuan, 030006, China

    Zhiqiang Zhang

  2. School of Mathematics and Computer Science, Shanxi Datong University, Datong, 037009, China

    Zhiqiang Zhang

  3. Department of Mathematical Sciences, University of Cincinnati, Cincinnati, OH, 45221-0025, USA

    Dan A. Ralescu

  4. Institute of Management and Decision, Shanxi University, Taiyuan, 030006, China

    Weiqi Liu

Authors
  1. Zhiqiang Zhang
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  2. Dan A. Ralescu
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  3. Weiqi Liu
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Correspondence to Dan A. Ralescu.

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Zhang, Z., Ralescu, D.A. & Liu, W. Valuation of interest rate ceiling and floor in uncertain financial market. Fuzzy Optim Decis Making 15, 139–154 (2016). https://doi.org/10.1007/s10700-015-9223-7

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  • DOI: https://doi.org/10.1007/s10700-015-9223-7

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