Regular Hom-algebras admitting a multiplicative basis

Let {({\mathfrak{H}},\mu,\alpha)} be a regular Hom-algebra of arbitrary dimension and over an arbitrary base field {{\mathbb{F}}}. A basis {{\mathcal{B}}=\{e_{i}\}_{i\in I}} of {{\mathfrak{H}}} is called multiplicative if for any {i,j\in I}, we have that {\mu(e_{i},e_{j})\in{\mathbb{F}}e_{k}} and {\alpha(e_{i})\in{\mathbb{F}}e_{p}} for some {k,p\in I}. We show that if {{\mathfrak{H}}} admits a multiplicative basis, then it decomposes as the direct sum {{\mathfrak{H}}=\bigoplus_{r}{{\mathfrak{I}}}_{r}} of well-described ideals admitting each one a multiplicative basis. Also, the minimality of {{\mathfrak{H}}} is characterized in terms of the multiplicative basis and it is shown that, in case {{\mathcal{B}}}, in addition, it is a basis of division, then the above direct sum is composed by means of the family of its minimal ideals, each one admitting a multiplicative basis of division.

Pricing in-arrears caps and ratchet caps under LIBOR market model with multiplicative basis

In Zhong (2018), LIBOR market model with multiplicative basis, International Journal of Financial Engineering, 5(2), we proposed a LIBOR market model with multiplicative basis, namely, the LMM-MB model, to model the joint evolution of the LIBOR rates and the OIS forward rates. This model leads to tractable pricing formulas for the standard interest rate derivatives such as the (vanilla) caplet, swaption and futures. In this paper, we study the pricing of some non-standard interest rate derivatives under the LMM-MB model, specifically the in-arrears (IA) cap and the ratchet cap. Similar to the vanilla caplet, we show that the pricing of the IA caplet can be readily computed by a proper integral of real-valued functions. We then derive an analytical approximation for the ratchet cap. In the case of non-zero spread, the ratchet cap can be approximated by using a two-dimensional fast Fourier transform method. In the case of zero spread, the ratchet cap can be computed from a proper integral of a single variable function. Numerical results reveal a good match of our close-form formulas with the Monte Carlo simulation method.

LIBOR market model with multiplicative basis

The study on the multiple-curve interest rate models becomes increasingly active since the 2007 credit crunch, for which one curve, typically the OIS curve, is used for discounting purpose, while the LIBOR curves (associated with various market tenors) are used for projecting the future cash flows. In this work, we extend the standard LIBOR market model to accommodate such multiple-curve setting by means of a multiplicative basis. The multiplicative basis is modeled as an exponential function of multi-factor square-root processes. Under the multiplicative basis setup, the OIS forward rates are correlated with the implied (additive) LIBOR-OIS spreads. We then derive closed-form pricing formulas for caplet, swaption, and interest rate futures in the multiplicative basis framework. In particular, we show that the valuation of caplet and swaption can be easily computed by a proper integral of real-valued functions, which facilitates the calibration of our model. Finally, we discuss a slight modification of our model to allow for negative interest rates.

n-Algebras admitting a multiplicative basis

Let [Formula: see text] be an [Formula: see text]-algebra of arbitrary dimension and over an arbitrary base field [Formula: see text]. A basis [Formula: see text] of [Formula: see text] is said to be multiplicative if for any [Formula: see text], we have either [Formula: see text] or [Formula: see text] for some (unique) [Formula: see text]. If [Formula: see text], we are dealing with algebras admitting a multiplicative basis while if [Formula: see text] we are speaking about triple systems with multiplicative bases. We show that if [Formula: see text] admits a multiplicative basis then it decomposes as the orthogonal direct sum [Formula: see text] of well-described ideals admitting each one a multiplicative basis. Also, the minimality of [Formula: see text] is characterized in terms of the multiplicative basis and it is shown that, under a mild condition, the above direct sum is by means of the family of its minimal ideals.