New method revolutionizes pricing of interest rate derivatives with jump shocks!
This paper explores how to price interest rate derivatives when interest rates have occasional sudden changes, using a model that includes both jumps and continuous movements. The researchers adapted a pricing framework to handle these situations and developed a method using control variates to improve the accuracy of Monte Carlo simulations. They found that this approach can provide more precise estimates of bond option prices, especially when dealing with complex volatility structures that don't have simple solutions.