Efficient Pricing of constant maturity swap spread options in a stochastic volatility LIBOR market model

2011 ◽  
Vol 14 (4) ◽  
pp. 37-72 ◽  
Author(s):  
Rüdiger Kiesel ◽  
Matthias Lutz
Keyword(s):  
Stochastic Volatility ◽  
Market Model ◽  
Libor Market Model ◽  
Spread Options

MODERN LIBOR MARKET MODELS: USING DIFFERENT CURVES FOR PROJECTING RATES AND FOR DISCOUNTING

2010 ◽  
Vol 13 (01) ◽  
pp. 113-137 ◽  
Author(s):  
FABIO MERCURIO
Keyword(s):  
Closed Form ◽  
Stochastic Volatility ◽  
Market Model ◽  
New Paradigm ◽  
Yield Curves ◽  
Market Models ◽  
Forward Rates ◽  
Libor Market Model ◽  
Market Practice ◽  
Joint Evolution

We introduce an extended LIBOR market model that is compatible with the current market practice of building different yield curves for different tenors and for discounting. The new paradigm is based on modeling the joint evolution of FRA rates and forward rates belonging to the discount curve. We will start by analyzing the basic lognormal case, then we will add stochastic volatility. The dynamics of FRA rates under different measures will be obtained and closed form formulas for caplets and swaptions derived in the lognormal and Heston (1993) cases.

Sign in / Sign up

Export Citation Format

Share Document