Applications of Gram-Charlier expansion and bond moments for pricing of interest rates and credit risk

Keiichi Tanaka, Takeshi Yamada and Toshiaki Watanabe

Quantitative Finance, 2010, vol. 10, issue 6, 645-662

Abstract: The purpose of this paper is to demonstrate the powerful and flexible applicability of the Gram-Charlier expansion to pricing of a wide variety of interest rate related products involving interest rate risk and credit risk. In this paper, we develop easily implemented approximations of the prices of several derivatives; swaptions, CMS, CMS options, and vulnerable options. Associated with the default risk, a survival contingent forward measure is constructed.

Keywords: Swaption; CMS; Affine term structure model; Convexity adjustment; Credit derivative; Survival contingent measure (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1080/14697680903193371

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