Skewed Libor Market Model and Gaussian HJM Explicit Approaches to Rolled Deposit Options

Posted: 25 Jul 2007

See all articles by Marc P. A. Henrard

Marc P. A. Henrard

muRisQ Advisory; OpenGamma; University College London - Department of Mathematics

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Abstract

An exotic option (floor on rolled deposit) is studied in the shifted log-normal Libor Market (LMM) and Gaussian HJM models. The shifted log-normal 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 perdictor-corrector adapted to explicit solutions. The results of the approximation are extremely good.

Keywords: Libor Market Model, Heath-Jarrow-Morton, skew, smile, explicitsolution, approximation, Bond Market Model, option on composition, existence results

JEL Classification: G13, E43, C63

Suggested Citation

Henrard, Marc P. A., Skewed Libor Market Model and Gaussian HJM Explicit Approaches to Rolled Deposit Options. Journal of Risk, Vol. 9, No. 4, 2007. Available at SSRN: https://ssrn.com/abstract=1002615

Marc P. A. Henrard (Contact Author)

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University College London - Department of Mathematics ( email )

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