Skewed Libor Market Model and Gaussian HJM explicit approaches to rolled deposit options
AbstractA simple exotic option (floor on rolled deposit) is studied in the shifted log-normal Libor Market (LMM) and Gaussian HJM models. The shifted log-normal LMM exhibits a controllable volatility skew. An explicit approach is used for both models. Using approximations the price in the LMM is obtained without Monte Carlo simulation. The more precise approximation uses a twisted version of the perdictor-corrector adapted to explicit solutions. The results of the approximation are surprisingly good.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 1534.
Date of creation: 11 Jan 2007
Date of revision:
Libor Market Model; Heath-Jarrow-Morton; skew; smile; explicit solution; approximation; Bond Market Model; option on composition; existence results;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
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