Valuation and risk management of vanilla Libor swaptions in a fallback

A procedure to price vanilla European Libor swaptions derived from the SABR model is presented


Georgios Skoufis uses the SABR model to derive a valuation formula for a vanilla swaption whose payoff involves a Libor swap rate constructed from a nonlinear function of a swap rate on a risk-free rate index. The analysis shows that the convexity effects can be expressed as symmetric quadratic derivatives, which are valued analytically with the SABR model

The transition from an interest rate benchmark regime centred on forward-looking interbank offered rates

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