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Calculation of the convexity adjustment to the forward rate in the Vasicek model for the forward in-arrears contracts on LIBOR rate


Authors: N. O. Malykh and I. S. Postevoy
Original publication: Teoriya Imovirnostei ta Matematichna Statistika, tom 99 (2018).
Journal: Theor. Probability and Math. Statist. 99 (2019), 189-198
MSC (2010): Primary 91G20; Secondary 91-02
DOI: https://doi.org/10.1090/tpms/1089
Published electronically: February 27, 2020
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Abstract | References | Similar Articles | Additional Information

Abstract: We calculate the convexity adjustment to the forward rate in the Vasicek model for the in-arrears forward contracts. With the help of the no-arbitrage market condition it is shown that such an adjustment should be non-negative. Analytical formulas are found for the in-arrears interest rate options.


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Additional Information

N. O. Malykh
Affiliation: Department of Innovation and High Technology, Moscow Institute of Physics and Technology, 9 Institutskiy per., Dolgoprudny, Moscow Region, 141701, Russian Federation
Email: malykh@phystech.edu

I. S. Postevoy
Affiliation: Department of Innovation and High Technology, Moscow Institute of Physics and Technology, 9 Institutskiy per., Dolgoprudny, Moscow Region, 141701, Russian Federation
Email: postevoi@phystech.edu

DOI: https://doi.org/10.1090/tpms/1089
Keywords: Convexity adjustment, forward rate agreement, Vasicek model, no-arbitrage market, in-arrears LIBOR, iFRA
Received by editor(s): September 10, 2018
Published electronically: February 27, 2020
Article copyright: © Copyright 2020 American Mathematical Society