Economics, Econometrics and Finance
4 years ago

New method accurately prices swap options, revolutionizing interest rate derivatives market.

The Journal of Fixed Income
Forward Rate Volatilities, Swap Rate Volatilities, and Implementation of the LIBOR Market Model
John C. Hull, Alan White

Paper Summary

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The article introduces new methods for pricing swap options using the LIBOR market model. It presents an accurate approximation for calculating swap rate volatilities from interest rate cap volatilities. This allows for the calibration of the model to broker quotes, enabling the valuation of various interest rate derivatives.