Cash no longer king in European swaptions

Barclays executives explore weaknesses of current pricing formulas for cash-settled swaptions

euro-buried-in-sand
Shifting sands: deficiencies in current pricing have been more apparent in the wake of the ECB’s stimulus measures

Over the last few years the European swaptions market has been quietly undergoing a fundamental shift, with the market reassessing old assumptions and models around the pricing of cash-settled swaptions. While the dollar and yen markets trade physically settled swaptions, the sterling and euro markets’ standard settlement methodology uses “par yield curve unadjusted” or internal rate of return (IRR) discounting. This is based on the so-called cash annuity which is a function only of the underlyi

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