Valuation and risk management of vanilla Libor swaptions in a fallback

Georgios Skoufis
21 Mar 2022

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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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