19 Contingent Claims Valuation---TheoryAMotivation The purpose of this chapter is to price interestrate options given the market prices of the entirezero-coupon bond price curve and its stochasticevolution. We do not ascertain whether these zero-coupon bond prices are correct relative to each other, asin arbitraging the yield curve. We therefore need to impose conditions on thezero-coupon bond price curve’s evolution, giventhe current market prices, so that it isarbitrage-free. Options are priced relative to this evolution.
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