Efficient Pricing and Greeks in the Cross-Currency LIBOR Market Model

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: cross-currency swaps (CCS) and power reverse dual currency (PRDC) swaps.

Number of Pages in PDF File: 35

Keywords: Interest rate derivatives, cross-currency LIBOR market model, BGM, PRDC, adjoint pathwise Greeks

working papers series