Accurate Pricing of Swaptions via Lower Bound

Anna Maria Gambaro (), Ruggero Caldana () and Gianluca Fusai ()
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Anna Maria Gambaro: Università Milano Bicocca
Ruggero Caldana: Accenture
Gianluca Fusai: City University London

Chapter Chapter 9 in Handbook of Recent Advances in Commodity and Financial Modeling, 2018, pp 183-208 from Springer

Abstract: Abstract We propose a new lower bound for pricing European-style swaptions for a wide class of interest rate models. This method is applicable whenever the joint characteristic function of the state variables is either known in closed form or can be obtained numerically via some efficient procedure. Our lower bound involves the computation of a one dimensional Fourier transform independently of the underlying swap length. Finally the bound can be used as a control variate to reduce the confidence interval in the Monte Carlo simulation. We test our bound on different affine models, also allowing for jumps. The lower bound is found to be accurate and computationally efficient.

Keywords: Pricing; Swaptions; Characteristic function; Fourier transform; Lower bound (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/978-3-319-61320-8_9

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