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A parabolic variational inequality arising from the valuation of fixed rate mortgages

Published online by Cambridge University Press:  15 August 2005

LISHANG JIANG ,
BAOJUN BIAN  and
FAHUAI YI
LISHANG JIANG
Affiliation:
Department of Mathematics, Tongji University, Shanghai 200092, China
BAOJUN BIAN
Affiliation:
Department of Mathematics, Tongji University, Shanghai 200092, China
FAHUAI YI
Affiliation:
Department of Mathematics, South China Normal University, Guangzhou 510631, China email: fhyi@scnu.edu.cn
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Abstract

In this paper a one-dimensional parabolic variational inequality which typically arises in option pricing of fixed rate mortgage loan is studied. The main goal is to study the properties of the free boundary. The monotonicity and $C^\infty$ smoothness of free boundary are proved and its behavior near expiry is considered as well.

Type
Papers
Information
European Journal of Applied Mathematics , Volume 16 , Issue 3 , June 2005 , pp. 361 - 383
Copyright
2005 Cambridge University Press

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