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Pricing and Hedging of Contingent Claims in Term Structure Models with Exogenous Issuing of New Bonds
Author(s) -
Sommer Daniel
Publication year - 1997
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00044
Subject(s) - heath–jarrow–morton framework , maturity (psychological) , term (time) , affine term structure model , bond , forward rate , econometrics , economics , cover (algebra) , outcome (game theory) , yield curve , bond valuation , mathematical economics , actuarial science , interest rate , monetary economics , finance , mechanical engineering , psychology , developmental psychology , physics , quantum mechanics , engineering
If calibrated to an observed term structure of interest rates that only covers a finite range of times‐to‐maturity an HJM‐model of the term structure of interest rates will eventually die out in finite time as bonds reach maturity. This poses problems for the pricing and hedging of certain contingent claims. Therefore, we extend the HJM‐model in such a way that it lives on an arbitrary time horizon and possesses term structures that cover a constant finite interval of times‐to‐maturity. We consider the pricing and hedging of contingent claims in this framework.