SFB 303 Discussion Paper No. B - 397

Author: Sommer, Daniel
Title: Pricing and Hedging of Contingent Claims in Term Structure Models with Exogenous Issuing of New Bonds
Abstract: 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.
Keywords: Term Structure of Interest Rates, Issuing of Long Term Bonds, Incomplete Markets, Minimal Martingale Measure, Option Pricing
JEL-Classification-Number: G12, G13, E43
Creation-Date: January 1997
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