Valuation of CMS range notes in a multifactor LIBOR market model

Ping Wu () and Robert J. Elliott
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Ping Wu: School of Mathematics and Statistics, Nanjing University of Information Science & Technology, No. 219 Nanjing, Jiangsu, China
Robert J. Elliott: Haskayne School of Business, University of Calgary, 2500 University Dr NW, Calgary, Canada3School of Mathematics, University of Adelaide, Adelaide SA 5000, Australia4Centre for Applied Financial Studies, University of South Australia, Adelaide SA 5001, Australia

International Journal of Financial Engineering (IJFE), 2016, vol. 03, issue 01, 1-19

Abstract: In the framework of a multifactor LIBOR market model (LMM), this paper presents a new approach for finding an approximate distribution of constant maturity swap (CMS) rates under the terminal martingale measure. With this approach, we derive an analytical pricing formula for CMS range notes, which is both intuitive and tractable. Many exotic CMS rate derivatives are widely traded in the marketplace or embedded in structure notes.

Keywords: LIBOR market model; constant maturity swap; CMS range notes (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2424786316500018

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