Swaptions
Combining the SABR and LMM models
Pierre Henry-Labordere analyses a stochastic volatility Libor market model that combines the SABR and Brace-Gatarek-Musiela (BGM) models in a natural way. Using an innovative geometrical method, he explains how to obtain analytical formulas for swaption…
A bridge between mortgage TBA options and swaptions
Shijun Liu provides basis-point volatility option pricing formulas for swaptions and mortgage to-be-announced options that make direct comparison of volatilities easy and transparent across the two interest rate derivatives markets. Basis-point…
A bridge between mortgage TBA options and swaptions
Interest Rates
Cash-settled swaptions and no-arbitrage
Brief Communication
Combining the SABR and LMM models
Pierre Henry-Labordere analyses a stochastic volatility Libor market model that combines the SABR and Brace-Gatarek-Musiela (BGM) models in a natural way
A time-homogeneous, SABR-consistent extension of the LMM
Riccardo Rebonato proposes an extension of the Libor market model (LMM) that recovers the stochastic, alpha, beta, rho (SABR) caplet prices almost exactly for all strikes and maturities. The dynamics of the volatility are chosen so as to be consistent…
A time-homogeneous, SABR-consistent extension of the LMM
Riccardo Rebonato proposes an extension of the Libor market model (LMM) that recovers the SABR caplet prices almost exactly for all strikes and maturities. The dynamics of the volatility are chosen so as to be consistent across expiries, to be…
Age of reason or age of procedure?
The risk management industry's increasing use of sophisticated models and technology – when coupled with poor modelling choices – can cause problems. Stephen Blyth calls for a return to to judgement and reasoning, and a halt to proceduralism.
Correlating market models
While swaption prices theoretically contain information on interest rate correlation, Bruce Choy, Tim Dun and Erik Schlögl argue that, for any practical purpose, this information cannot be extracted. Care must therefore be taken when pricing correlation…
Calibrating Libor
With a rich spectrum of maturities and tenors to contend with, the toughest aspect of pricing interest rate options is calibrating models of forward rates to market data. Here, Damiano Brigo and Fabio Mercurio present a scheme for simultaneously…
Swaptions with a smile
Masterclass – with JP Morgan