SABR smiles for RFR caplets

The SABR model for volatility is adapted to price risk-free rate caplets and for capturing smile dynamics


Sander Willems presents a natural extension of the stochastic alpha beta rho (SABR) model to price both backward- and forward-looking risk-free rate (RFR) caplets in a post-Libor world. The author provides closed-form effective SABR parameters for pricing backward-looking RFR caplets. These results are useful for smile interpolation and for analysing backward- and forward-looking smiles in normalised units

Following a speech by the Financial Conduct Authority in July

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