Using path integrals to price interest rate derivatives

We present a new approach for the pricing of interest rate derivatives which allows a direct computation of option premiums without deriving a (Black-Scholes type) partial differential equation and without explicitly solving the stochastic process for the underlying variable. The approach is tested by rederiving the prices of a zero bond and a zero bond option for a short rate environment which is governed by Vasicek dynamics. Furthermore, a generalization of the method to general short rate mod...