Title: Options pricing models of interest rate index: a comparative of pricing methodologies applied to the Brazilian market

Authors: João Luiz Chela; Rodolfo Rosina

Addresses: Getulio Vargas Foundation (FGV), Brazil ' Getulio Vargas Foundation (FGV), Brazil

Abstract: This paper proposes to compare two options pricing models of interest rate index used in the Brazilian market and verify the best performance model. The models compared are those of Heath-Jarrow-Morton (HJM) of Brace and Musiela (1994) and Black model with expectations of the Monetary Policy Committee Meeting (Comitê de Políticas Monetárias - COPOM) of De Genaro and Avellaneda (2012) that are used by diverse investors in the financial market. For the comparison of the models we used option structures, negotiated prices and the theoretical price calculated by the Brazilian Stock Exchange (B3). After the stress test and the results of the comparisons the Alan de Genaro (ADG) model pricing - proposed by De Genaro and Avellaneda (2012) - obtained better performance than HJM model, proving to be more adequate to the reality of the Brazilian index interest rates options.

Keywords: interest rate derivatives.

DOI: 10.1504/IJFMD.2019.101236

International Journal of Financial Markets and Derivatives, 2019 Vol.7 No.1, pp.40 - 53

Received: 13 Jun 2018
Accepted: 10 Feb 2019
Published online: 29 Jul 2019 *

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