We introduce a simple extension of a shifted geometric Brownian motion for modelling forward LIBOR rates under their canonical measures. The extension is based on a parameter uncertainty modelled through a random variable whose value is drawn at an in¯nitesimal time after zero. The shift in...

We develop an asymptotic expansion technique for pricing timer options under general stochastic volatility models around small volatility of variance. Closed-form approximation formulas have been obtained for the Heston model and the 3/2-model. The approximation has an easy-to-understand...

<section xml:id="fut21659-sec-0001"> We develop an approximation technique for pricing finite‐maturity timer options under Heston‐like stochastic volatility models. By approximating the distributions of the accumulated variance and the random variance budget exceeding time, we obtain analytic expressions for timer option...</section>

Recent empirical studies on interest rate derivatives have shown that the volatility structure of interest rates is frequently humped. Several researchers have modelled interest rate dynamics in such a way that humped volatility structures are possible and yet analytical formulas for European...

We develop an asymptotic expansion technique for pricing timer options in stochastic volatility models when the effect of volatility of variance is small. Based on the pricing PDE, closed-form approximation formulas have been obtained. The approximation has an easy-to-understand...

We introduce an extended LIBOR market model that is compatible with the current market practice of building different yield curves for different tenors and for discounting. The new paradigm is based on modeling the joint evolution of FRA rates and forward rates belonging to the discount curve....