Pricing CMS spreads in the Libor market model
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Date
2008
Volume
1386
Issue
Journal
Series Titel
WIAS Preprints
Book Title
Publisher
Berlin : Weierstraß-Institut für Angewandte Analysis und Stochastik
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Abstract
We present two approximation methods for pricing of CMS spread options in Libor market models. Both approaches are based on approximating the underlying swap rates with lognormal processes under suitable measures. The first method is derived straightforwardly from the Libor market model. The second one uses a convexity adjustment technique under a linear swap model assumption. A numerical study demonstrates that both methods provide satisfactory approximations of spread option prices and can be used for calibration of a Libor market model to the CMS spread option market.
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Citation
Belomestny, D., Kolodko, A., & Schoenmakers, J. (2008). Pricing CMS spreads in the Libor market model. Berlin : Weierstraß-Institut für Angewandte Analysis und Stochastik.
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This document may be downloaded, read, stored and printed for your own use within the limits of § 53 UrhG but it may not be distributed via the internet or passed on to external parties.
This document may be downloaded, read, stored and printed for your own use within the limits of § 53 UrhG but it may not be distributed via the internet or passed on to external parties.