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Interest-Rate Derivatives Using Closed-Form Solutions

Pricing Caps and Floors Using the Black Option Model

Caps and floors are contracts that allow the holder to be protected if interest rates rise or decrease. The Black model uses a forward price as an underlier in place of a spot price. The assumption is that the forward price at maturity of the option is log-normally distributed.

Closed-form solutions for pricing caps and floors using the Black model support the following tasks:



Price the interest rate caps using the Black option pricing model.


Price the interest rate floors using the Black option pricing model.


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