Skewed Libor Market Model and Gaussian HJM explicit approaches to rolled deposit options

Marc Henrard ()

MPRA Paper from University Library of Munich, Germany

Abstract: A simple exotic option (floor on rolled deposit) is studied in the shifted log-normal Libor Market (LMM) and Gaussian HJM models. The shifted log-normal LMM exhibits a controllable volatility skew. An explicit approach is used for both models. Using approximations the price in the LMM is obtained without Monte Carlo simulation. The more precise approximation uses a twisted version of the perdictor-corrector adapted to explicit solutions. The results of the approximation are surprisingly good.

Keywords: Libor Market Model; Heath-Jarrow-Morton; skew; smile; explicit solution; approximation; Bond Market Model; option on composition; existence results (search for similar items in EconPapers)
JEL-codes: C63 E43 G13 (search for similar items in EconPapers)
Date: 2007-01-11
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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