We study the problem of pricing an inflation adjusted annuity in a forward rates market with jumps. Since the market will be incomplete, we use the minimalfq-martingale measureQqwhich we use for computing discounted expectations. We give explicit results forQqtogether with explicit results for the price of the annuity.
In this chapter the reader is introduced to the basic concepts of interest rate theory. Starting with a market for zero coupon bonds we define the relevant interest rates such as the short rate, the spot rates, and the forward rates. There is an in-depth study of the relations between the dynamics of these rates, and we also discuss some more applied topics as fixed coupon bonds, floating rate bonds, yields, duration, and convexity.
Out-of-Sample Predictions of Bond Excess Returns and Forward Rates: An Asset-Allocation Perspective