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CMS swaps in separable one-factor Gaussian LLM and HJM model

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  • Henrard, Marc

Abstract

An approximation approach to Constant Maturity Swaps (CMS) pricing in the separable one-factor Gaussian LLM and HJM models is presented. The approximation used is a Taylor expansion on the swap rate as a function of a random variable which is intuitively similar to a (short) rate. This approach is different from the standard approach in CMS where the discounting is written as a function of the swap rate. The approximation is very efficient.

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File URL: http://mpra.ub.uni-muenchen.de/3228/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3228.

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Date of creation: 08 May 2007
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Handle: RePEc:pra:mprapa:3228

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Keywords: CMS swap; LLM model; HJM model; one factor; approximation;

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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. Marc Henrard, 2006. "A Semi-Explicit Approach to Canary Swaptions in HJM One-Factor Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 1-18.
  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. Marc Henrard, 2003. "Explicit bond option and swaption formula in Heath-Jarrow-Morton one factor model," Finance 0310009, EconWPA.
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Cited by:
  1. Jiří Witzany, 2009. "Valuation of Convexity Related Interest Rate Derivatives," Prague Economic Papers, University of Economics, Prague, vol. 2009(4), pages 309-326.

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