Technical papers/Interest Rate Derivatives
SABR goes normal
The benchmark stochastic alpha beta rho model for interest rate derivatives was designed for an environment of 5% base rates, but its traditional implementation method based on a lognormal volatility expansion...
The classic approach to the benchmark interest rate options model leads to nonsensical negative probabilities at low strikes – but a new approach promises to fix the puzzle, and allow the pricing of...
The one-curve world of pre-crisis modelling is long gone – now derivatives desks need to use a variety of fixings depending on the product traded. Here, Fabio Mercurio and Zhenqiu Xie show how a stochastic...
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More Technical papers/Interest Rate Derivatives articles
Cutting edge introduction: exploring constant maturity asset swaps
New product design has been on the wane for the past few years, but there are still ideas floating around. This month’s technical section includes an article exploring a potentially interesting market – derivatives referencing asset swap spreads....
CMS: covering all bases
Simon Cedervall and Vladimir Piterbarg develop a new vanilla model that directly links constant maturity swap (CMS) and payment convexity in general payouts to volatilities of swaptions of all relevant tenors, as well as prices of CMS spread options,...
Full implications for CMS convexity
Simon Cedervall and Vladimir Piterbarg develop a new vanilla model that directly links constant maturity swap (CMS) and payment convexity in general payouts to volatilities of swaptions of all relevant tenors, as well as prices of CMS spread options,...
CMS: covering all bases
Simon Cedervall and Vladimir Piterbarg develop a new vanilla model that directly links constant maturity swap (CMS) and payment convexity in general payouts to volatilities of swaptions of all relevant tenors, as well as prices of CMS spread options,...
General short-rate analytics
Alexandre Antonov and Michael Spector present an analytical approximation of zero-coupon bonds and swaption prices for general short-rate models. The approximation is based on regular and singular expansions with respect to low volatility and contains...
General short-rate analytics
Alexandre Antonov and Michael Spector present an analytical approximation of zero-coupon bonds and swaption prices for general short-rate models. The approximation is based on regular and singular expansions with respect to low volatility and contains...
The CMS triangle arbitrage
A dislocation between options on constant maturity swap rates and spreads in 2009 led to a static arbitrage opportunity. Here, Paul McCloud shows how this can be detected, and how a copula-based model strategy can exploit it
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