We propose a new derivation of the Heath–Jarrow–Morton risk-neutral drift restriction that takes into account nonzero instantaneous correlations between factors. The result allows avoiding the orthogonalization of factors and provides an approach by which interest rate derivatives can be...

Using a finite dimensional Hilbert space framework, this work proposes a new derivation of the HJM [D. Heath, R. Jarrow, A. Morton, Bond pricing and the term structure of interest rates: A New Methodology for Contingent Claims Valuation, Econometrica 60 (1992) 77-105] risk-neutral drift that...

Motivated by statistical tests on historical data that confirm the normal distribution assumption on the spreads between major constant maturity swap (CMS) indexes, we propose an easy-to-implement two-factor model for valuing CMS spread link instruments, in which each forward CMS spread rate is...