Pricing a Cap under the Affine Term Structure Interest Rate Model

Abstract

is the Pearson-Sun model proposed by Pearson and Sun (1994). This allow company’s (investors, risk managers) to hedge against the risk associated with floating interest rate fluctuations going beyond a certain strike rate(the cap rate). The study obtained an expression for the price of the cap which consists of the price of a zero coupon bond written on the Pearson-Sun model plus a cumulative sum of continuously traded caplets, where each caplet is the price of a European call option with strike price as the cap level ........

Keywords : Interest rate modeling, Pearson-Sun Model, Price of a Cap, Term Structure of Interest Rate, Zero-coupon Bond,