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
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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
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