Alternative risk-free rates (RFRs) play a central role in the reform of interest rate benchmarks. We study a short-rate model for RFRs driven by a general affine process. In this context, under minimal assumptions, we derive explicit valuation formulas for forward-looking and backward-looking caplets/floorlets as well as term-basis caplets.
Short communication: caplet pricing in affine models for alternative risk-free rates
Claudio Fontana
2023
Abstract
Alternative risk-free rates (RFRs) play a central role in the reform of interest rate benchmarks. We study a short-rate model for RFRs driven by a general affine process. In this context, under minimal assumptions, we derive explicit valuation formulas for forward-looking and backward-looking caplets/floorlets as well as term-basis caplets.
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