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A Semi-Explicit Approach to Canary Swaptions in HJM One-Factor Model

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  • Marc Henrard

Abstract

Leveraging the explicit formula for European swaptions and coupon-bond options in the HJM one-factor model, a semi-explicit formula for 2-Bermudan options (also called Canary options) is developed. The European swaption formula is extended to future times. So equipped, one is able to reduce the valuation of a 2-Bermudan swaption to a single numerical integration at the first expiry date. In that integration the most complex part of the embedded European swaptions valuation has been simplified to perform it only once and not for every point. In a special but very common in practice case, a semi-explicit formula is provided. Those results lead to a significantly faster and more precise implementation of swaption valuation. The improvements extend even more favourably to sensitivity calculations.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 13 (2006)
Issue (Month): 1 ()
Pages: 1-18

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Handle: RePEc:taf:apmtfi:v:13:y:2006:i:1:p:1-18

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Related research

Keywords: Bermudan swaption; HJM one-factor model; Hull-White model; explicit formula; numerical integration;

References

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  1. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  2. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
  3. Marc Henrard, 2004. "Semi-explicit Delta and Gamma for European swaptions in Hull- White one factor model," Finance 0411036, EconWPA, revised 25 Jan 2005.
  4. Marc Henrard, 2003. "Explicit bond option and swaption formula in Heath-Jarrow-Morton one factor model," Finance 0310009, EconWPA.
  5. Marc Henrard, 2005. "Bermudan swaptions in Hull-White one-factor model: analytical and numerical approaches," Finance 0505023, EconWPA.
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Cited by:
  1. Henrard, Marc, 2006. "TIPS Options in the Jarrow-Yildirim model," MPRA Paper 1423, University Library of Munich, Germany.
  2. Henrard, Marc, 2006. "Bonds futures: Delta? No gamma!," MPRA Paper 2249, University Library of Munich, Germany, revised 01 May 2006.
  3. Henrard, Marc, 2007. "Skewed Libor Market Model and Gaussian HJM explicit approaches to rolled deposit options," MPRA Paper 1534, University Library of Munich, Germany.
  4. Henrard, Marc, 2007. "CMS swaps in separable one-factor Gaussian LLM and HJM model," MPRA Paper 3228, University Library of Munich, Germany.
  5. Henrard, Marc, 2006. "Bonds futures and their options: more than the cheapest-to-deliver; quality option and marginning," MPRA Paper 2001, University Library of Munich, Germany.

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