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| Main Authors: | , |
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| Format: | Preprint |
| Published: |
2024
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| Subjects: | |
| Online Access: | https://arxiv.org/abs/2401.15728 |
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| _version_ | 1866914750045093888 |
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| author | Romero-Bermúdez, Aurelio Turfus, Colin |
| author_facet | Romero-Bermúdez, Aurelio Turfus, Colin |
| contents | We introduce a perturbative formalism to solve the backward-looking futures pricing problem. The formalism is based on a time-ordered exponential series which allows to derive the functional form of the integral kernel associated to the backward-Kolmogorov diffusion PDE. We present an analytic pricing formula for SOFR futures contracts under an extension of the Hull-White model which incorporates not only the intrinsic convexity adjustments captured by Mercurio [2018], but also the skew and smile observed in options markets as done in Turfus and Romero-Bermúdez [2023]. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2401_15728 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Analytic Pricing of SOFR Futures Contracts with Smile and Skew Romero-Bermúdez, Aurelio Turfus, Colin Mathematical Finance Pricing of Securities We introduce a perturbative formalism to solve the backward-looking futures pricing problem. The formalism is based on a time-ordered exponential series which allows to derive the functional form of the integral kernel associated to the backward-Kolmogorov diffusion PDE. We present an analytic pricing formula for SOFR futures contracts under an extension of the Hull-White model which incorporates not only the intrinsic convexity adjustments captured by Mercurio [2018], but also the skew and smile observed in options markets as done in Turfus and Romero-Bermúdez [2023]. |
| title | Analytic Pricing of SOFR Futures Contracts with Smile and Skew |
| topic | Mathematical Finance Pricing of Securities |
| url | https://arxiv.org/abs/2401.15728 |