New model predicts interest rate changes with high accuracy and efficiency!
The article presents a model for valuing American-style swaptions using two factors: short-term interest rates and futures rate premiums. This model extends previous work by incorporating mean-reverting factors. It is computationally efficient due to its use of Libor futures prices and a modified binomial approximation method. The model accurately reflects the term structure of futures rates and volatilities implied by interest rate caps and floors.