FAST AND ACCURATE PRICING AND HEDGING OF LONG-DATED CMS SPREAD OPTIONS

Mark Joshi () and Chao Yang ()
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Mark Joshi: Centre for Actuarial Studies, Department of Economics, University of Melbourne, Victoria 3010, Australia
Chao Yang: Centre for Actuarial Studies, Department of Economics, University of Melbourne, Victoria 3010, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2010, vol. 13, issue 06, 839-865

Abstract: We present a fast method to price and hedge CMS spread options in the displaced-diffusion co-initial swap market model. Numerical tests demonstrate that we are able to obtain sufficiently accurate prices and Greeks with computational times measured in milliseconds. Further, we find that CMS spread options are weakly dependent on the at-the-money Black implied volatility skews.

Keywords: Spread option; Gaussian quadrature rule; delta; vega; market skew sensitivity (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1142/S0219024910006029

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