Polynomial algorithms for pricing path-dependent interest rate instruments

Ronald Hochreiter, Georg Ch. Pflug

Publication: Scientific journalJournal articlepeer-review

Abstract

In this paper we study algorithms for pricing of interest rate instruments using recombining
tree (scenario lattice) interest models. The price is defined as expected discounted cash flow. If the
cash-flow generated by the instrument depends on the full or partial history of interest rates (pathdependent
contracts), then pricing algorithms are typically of exponential complexity. We show that
for some models, including product form cash-flows, additive cash-flows, delayed cash-flows and
limited path-dependent cash-flows, polynomial pricing algorithms exist
Original languageEnglish
Pages (from-to)291 - 309
JournalComputational Economics
Volume28
Issue number3
Publication statusPublished - 1 Nov 2006

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