Journal of Computational Finance

Efficient Pricing of constant maturity swap spread options in a stochastic volatility LIBOR market model

Rüdiger Kiesel, Matthias Lutz


The calibration of LIBOR market models with stochastic volatility to quoted constant maturity swap (CMS) spread option prices requires fast yet accurate approximation methods for pricing such options. This paper develops a new method for the fast evaluation of the density of an integrated Cox-Ingersoll-Ross process. Combined with approximations for the swap-rate dynamics, this results in a semianalytical formula for CMS spread option prices. The effectiveness of this formula is demonstrated by comparison with Monte Carlo values.

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