We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
Caplets/Floorlets with Backward-Looking Risk-Free Rates under the One- and Two-Factor Hull-White Models.
- Authors
Russo, Vincenzo; Fabozzi, Frank J.
- Abstract
The transition from interbank offered rates (IBOR) to the new risk-free rates, and in particular the adoption of the backward-looking approach in place of the forward-looking one, affects the interest rate modeling and the pricing of interest rate derivatives. In this article, we introduce the pricing formula for caplets/floorlets with backward-looking risk-free rates under the one- and two-factor Hull-White model. In particular, we derive the appropriate volatility function for caplets/floorlets to be used in the pricing formula under the two-factor Hull-White model and, implicitly, under the one-factor Hull-White model. Our formulation allows us to obtain, as a particular case, the caplet/floorlet formula under the IBOR environment with a forward-looking rates approach. A numerical analysis is performed to illustrate the main feature of the proposed model and in order to provide a comparison in evaluating caplets/floorlets under both forward-looking and backward-looking approaches.
- Publication
Journal of Derivatives, 2023, Vol 31, Issue 1, p96
- ISSN
1074-1240
- Publication type
Academic Journal
- DOI
10.3905/jod.2023.1.186