Economics, Econometrics and Finance
4 years ago

New formula revolutionizes pricing of interest rate swaptions and caps!

RePEc: Research Papers in Economics
Pricing Swaptions under the Libor Market Model of Interest Rates with Local-Stochastic Volatility Models
Kenichiro Shiraya, Akihiko Takahashi, Akira Yamazaki

Paper Summary

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A new method for pricing swaptions and caps/floors under the LIBOR market model of interest rates with local-stochastic volatility models has been developed. This method uses drift-freezing and asymptotic expansion approaches to approximate prices accurately. The method is flexible and accurate, as shown in examples using CEVHeston LMM and Quadratic-Heston LMM models for numerical evaluation of swaption values in a caplet market.