Journal of Risk

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Efficient pricing and Greeks in the cross-currency LIBOR market model

Chris J. Beveridge, Mark S. Joshi and Will M. Wright

ABSTRACT

We discuss the issues involved in an efficient computation of the price and sensitivities of Bermudan exotic interest rate derivatives in the cross-currency displaced diffusion LIBOR market model. Improvements recently developed for an efficient implementation of the displaced diffusion LIBOR market model are extended to the cross-currency setting, including the adjoint-improved pathwise method for computing sensitivities and techniques used to handle Bermudan optionality. To demonstrate the application of this work, we provide extensive numerical results on two commonly traded cross-currency exotic interest rate derivatives: crosscurrency swaps and power reverse dual currency swaps.

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