Journal of Risk

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Skewed Libor market model and Gaussian HJM explicit approaches to rolled deposit options

Marc Henrard

ABSTRACT

An exotic option (floor on rolled deposit) is studied in the shifted lognormal Libor market model (LMM) and Gaussian HJM models. The shifted lognormal LMM exhibits a controllable volatility skew. An explicit approach is used for both models. Using approximations, the price in the LMM is obtained without Monte Carlo simulation. The more precise approximation uses a version of the predictor-corrector adapted to explicit solutions. The results of the approximation are extremely good.

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