An informationally efficient price keeps investors as a group in the state of maximum uncertainty about the next price change. The Entropy Pricing Theory captures this intuition and suggests that, in informational efficient markets, perfectly uncertain market beliefs must prevail. When the entropy function is used to index collective market uncertainty, then the entropy-maximizing consensus beliefs must prevail. The Entropy Pricing Theory resolves the ambiguity of arbitrage-free valuation in incomplete markets. In this paper, on the basis of the Entropy Pricing Theory, the analytic formulas of valuation of caps, floors, collars and European swaption of interest rate are given with parallel to Black-Scholes option pricing model, and their simplifying formula are presented respectively, which offer a new way to price interest rate options in incomplete market.
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