An Approximate Closed Formula for European Mortgage Options
A. M. Lopez Galvan
Abstract:The aim of this paper is to investigate the use of close formula approximation for pricing European mortgage options. Under the assumption of logistic duration and normal mortgage rates the underlying price at the option expiry is approximated by shifted lognormal or regular lognormal distribution by matching moments. Once the price function is approximated by lognormal distributions, the option price can be computed directly as an integration of the distribution function over the payoff at the option expiry b… Show more
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