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Valuation of ATM European swaptions with the libor market model
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| 1.18 MB | Adobe PDF |
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Resumo(s)
This working project developped a pricing tool for at-the-money European swaptions using the
LMM. The tool is benchmarked by transforming quoted implied volatiliy of swaptions to market
prices in euro, using Black’s formula. When including a volatility structure calibrated on market
data, the tool succeeds in pricing swaptions with a 2 till 5 years tenor. For shorter tenors, 1 year,
or longer tenors, 7-10 years, the tool does not perform well, due to issues fitting today’s unique
volatility term structure. Improvements on the volatility calibration are suggested, as well as
possible extensions of the tool towards non-at-the-money and exotic products.
Descrição
Palavras-chave
Finance Interes rate modelling Libor market model Interest rate derivatives Swaptions