References (25)


Citations (4)



Swaptions in Libor Market Model with Local Volatility

Marc P. A. Henrard

OpenGamma; University College London - Department of Mathematics

June 27, 2007

The original Libor Market Model (LMM) has been extended to several dynamics (or local volatilities) for the underlying Libor rates. The main result presented here is a generic approximation that provides an explicit swaptions price for local volatilities LMM. The approximation is base on an initial freeze approximation very efficient in the Bond Market Model and a corrector or Runge-Kutta approach. The approximation is not done at the path level but at the global level for a given strike allowing a smile calibration. The approximation efficiency is analyzed in details in the displaced diffusion case; it is analyzed by comparison to precise Monte Carlo simulations.

Number of Pages in PDF File: 16

Keywords: Explicit formula, Libor Market Model, displaced diffusion, local volatility, smile, approximation, calibration

JEL Classification: G13, E43, C63

Open PDF in Browser Download This Paper

Date posted: February 28, 2008 ; Last revised: January 21, 2009

Suggested Citation

Henrard, Marc P. A., Swaptions in Libor Market Model with Local Volatility (June 27, 2007). Available at SSRN: https://ssrn.com/abstract=1098420 or http://dx.doi.org/10.2139/ssrn.1098420

Contact Information

Marc P. A. Henrard (Contact Author)
OpenGamma ( email )
107 Leadenhall Street - 5th floor
London, EC3A 4AF
United Kingdom
University College London - Department of Mathematics ( email )
Gower Street
London, WC1E 6BT
United Kingdom
Feedback to SSRN

Paper statistics
Abstract Views: 2,288
Downloads: 742
Download Rank: 25,205
References:  25
Citations:  4