Journal of Computational Finance

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The pricing of floating rate instruments

Lara Cathcart

ABSTRACT

This paper derives analytical solutions for floating rate instruments in a continuous-time valuation framework when the underlying interest rate is a mean-reverting square-root process. The partial differential equation obtained is solved subject to the appropriate boundary conditions by application of the Laplace transform, which yields solutions involving the confluent hypergeometric functions. The model is also applied to the valuation of callable bonds.

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