THE EFFICIENT COMPUTATION OF PRICES AND GREEKS FOR CALLABLE RANGE ACCRUALS USING THE DISPLACED-DIFFUSION LMM

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

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 01, 1-47

Abstract: We study the simulation of range accrual coupons when valuing callable range accruals in the displaced-diffusion LIBOR market model (DDLMM). We introduce a number of new improvements that lead to significant efficiency improvements, and explain how to apply the adjoint-improved pathwise method to calculate deltas and vegas under the new improvements, which was not previously possible for callable range accruals. One new improvement is based on using a Brownian-bridge-type approach for simulating the range accrual coupons. We consider a variety of examples, including when the reference rate is a LIBOR rate, when it is a spread between swap rates, and when the multiplier for the range accrual coupon is stochastic.

Keywords: LMM; BGM; Callable range accrual; displaced-diffusion; Greeks; pathwise (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1142/S0219024914500010

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