Analyzes American-style interest rate options near expiry, indicating valuable pricing insights.
We use an asymptotic expansion to study the behavior of Americanstyle interest rate caplets and floorlets close to expiry, under the assumption that interest rates obey a mean-reverting random walk as given by the Vasicek model.Series solutions are obtained for the location of the free boundary and the price of the option for both the caplet and floorlet.
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Alobaidi et al. (2004) studied this question.
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