Skewed Libor market model and Gaussian HJM explicit approaches to rolled deposit options

Marc Henrard

Journal of Risk

Abstract: ABSTRACT An exotic option (floor on rolled deposit) is studied in the shifted lognormal Libor market model (LMM) and Gaussian HJM models. The shifted lognormal 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 version of the predictor-corrector adapted to explicit solutions. The results of the approximation are extremely good.

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