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Callable Swaps, Snowballs And Videogames

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  • Albanese, Claudio

Abstract

Although economically more meaningful than the alternatives, short rate models have been dismissed for financial engineering applications in favor of market models as the latter are more flexible and best suited to cluster computing implementations. In this paper, we argue that the paradigm shift toward GPU architectures currently taking place in the high performance computing world can potentially change the situation and tilt the balance back in favor of a new generation of short rate models. We find that operator methods provide a natural mathematical framework for the implementation of realistic short rate models that match features of the historical process such as stochastic monetary policy, calibrate well to liquid derivatives and provide new insights on complex structures. In this paper, we show that callable swaps, callable range accruals, target redemption notes (TARNs) and various flavors of snowballs and snowblades can be priced with methods numerically as precise, fast and stable as the ones based on analytic closed form solutions by means of BLAS level-3 methods on massively parallel GPU architectures.

Suggested Citation

  • Albanese, Claudio, 2007. "Callable Swaps, Snowballs And Videogames," MPRA Paper 5229, University Library of Munich, Germany, revised 01 Oct 2007.
    • Handle: RePEc:pra:mprapa:5229
    as

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    File URL: https://mpra.ub.uni-muenchen.de/5229/1/MPRA_paper_5229.pdf
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    References listed on IDEAS

    as
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    7. Albanese, Claudio, 2006. "Operator Methods, Abelian Processes And Dynamic Conditioning," MPRA Paper 5246, University Library of Munich, Germany, revised 06 Nov 2007.
    8. Klaus Sandmann & Dieter Sondermann, 1997. "A Note on the Stability of Lognormal Interest Rate Models and the Pricing of Eurodollar Futures," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 119-125, April.
    9. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    10. Lin Chen, "undated". "Interest Rate Dynamics and Derivatives Pricing," Computing in Economics and Finance 1997 129, Society for Computational Economics.
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    1. Albanese, Claudio, 2006. "Operator Methods, Abelian Processes And Dynamic Conditioning," MPRA Paper 5246, University Library of Munich, Germany, revised 06 Nov 2007.

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    More about this item

    Keywords

    Interest Rate Derivatives; stochastic monetary policy; callable swaps; snowballs; GPU programming; operator methods;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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