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Back-Of-The-Envelope Swaptions In A Very Parsimonious Multi-Curve Interest Rate Model

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  • ROBERTO BAVIERA

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

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.

Suggested Citation

  • Roberto Baviera, 2019. "Back-Of-The-Envelope Swaptions In A Very Parsimonious Multi-Curve Interest Rate Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(05), pages 1-24, August.
    • Handle: RePEc:wsi:ijtafx:v:22:y:2019:i:05:n:s0219024919500274
    DOI: 10.1142/S0219024919500274
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    References listed on IDEAS

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    Cited by:

    1. Baviera, Roberto & Nassigh, Aldo & Nastasi, Emanuele, 2021. "A closed formula for illiquid corporate bonds and an application to the European market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).

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