Pricing Interest Rate Derivatives under Stochastic Volatility

This paper derives semi-closed-form solutions to a variety of interest rate derivatives prices. Our approach consists of first deriving the Frobenius series solution to the cross-moments gener-ating function, and then inverting the characteristic function using the Gauss-Laguerre quadra-ture rule for the corresponding cumulative probabilities. We apply our approach to value options on discount bonds, coupon bond options, swaptions, interest rate caps, floors, and collars. Our approach is found to be both accurate and fast, and it compares favorably with some alternative approaches in the literature. JEL Classification: G12; G13