BACK-OF-THE-ENVELOPE SWAPTIONS IN A VERY PARSIMONIOUS MULTI-CURVE INTEREST RATE MODEL

Roberto Baviera ()
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Roberto Baviera: Department of Mathematics, Politecnico di Milano, 32 p.zza L. da Vinci, I-20133 Milano, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2019, vol. 22, issue 05, 1-24

Abstract: We propose an elementary model in multi-curve setting that allows to price with simple exact closed formulas European swaptions. Swaptions can be both physical delivery and cash-settled ones. The proposed model is very parsimonious: it is a three-parameter multi-curve extension of the two-parameter J. Hull & A. White (1990) [Pricing interest-rate-derivative securities. Review of Financial Studies 3(4), 573–592] model. The model allows also to obtain simple formulas for all other plain vanilla Interest Rate derivatives and convexity adjustments. Calibration issues are discussed in detail.

Keywords: Multi-curve interest rates; parsimonious modeling; cash-settled swaptions; physical delivery swaptions; calibration cascade (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S0219024919500274

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