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Fast And Accurate Pricing And Hedging Of Long-Dated Cms Spread Options

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Author Info

  • MARK JOSHI

    ()
    (Centre for Actuarial Studies, Department of Economics, University of Melbourne, Victoria 3010, Australia)

  • CHAO YANG

    ()
    (Centre for Actuarial Studies, Department of Economics, University of Melbourne, Victoria 3010, Australia)

Abstract

We present a fast method to price and hedge CMS spread options in the displaced-diffusion co-initial swap market model. Numerical tests demonstrate that we are able to obtain sufficiently accurate prices and Greeks with computational times measured in milliseconds. Further, we find that CMS spread options are weakly dependent on the at-the-money Black implied volatility skews.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 13 (2010)
Issue (Month): 06 ()
Pages: 839-865

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Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:06:p:839-865

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Related research

Keywords: Spread option; Gaussian quadrature rule; delta; vega; market skew sensitivity;

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Cited by:
  1. Cristian Homescu, 2011. "Adjoints and Automatic (Algorithmic) Differentiation in Computational Finance," Papers 1107.1831, arXiv.org.
  2. Joshi, Mark & Yang, Chao, 2011. "Fast delta computations in the swap-rate market model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 764-775, May.

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