Basket CMS Derivatives in Term Structure Market Models with Stochastic Volatility

21 Pages Posted: 22 Dec 2012

See all articles by Joerg Kienitz

Joerg Kienitz

University of Wuppertal - Applied Mathematics; University of Cape Town (UCT)

Peter Schuetterle

E.on Energy Trading

Manuel Wittke

Deloitte & Touche - Financial Risk Solutions

Date Written: December 21, 2012

Abstract

We consider the pricing of Caps and Floors on CMS baskets in term structure models. To this end we shortly review CMS indices and the market for financial products based on these indices.

Having specified the financial products we review two popular Stochastic Volatility Libor Market Model frameworks for pricing interest rate derivatives and show how to derive (semi-) analytical pricing formulas within these frameworks. The stochastic volatility is of Heston or SABR type.

Our proposed methods do not only allow the fast pricing of basket CMS Caps and Floors but they can also be applied to calibrate the market models by taking into account market quotes for CMS and CMS spread options.

Keywords: Libor Market Model, Stochastic Volatility, CMS, Markovian Projection, Parameter Averaging, Spread Options

Suggested Citation

Kienitz, Joerg and Schuetterle, Peter and Wittke, Manuel, Basket CMS Derivatives in Term Structure Market Models with Stochastic Volatility (December 21, 2012). Available at SSRN: https://ssrn.com/abstract=1150898 or http://dx.doi.org/10.2139/ssrn.1150898

Joerg Kienitz (Contact Author)

University of Wuppertal - Applied Mathematics ( email )

Gaußstraße 20
42097 Wuppertal
Germany

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Peter Schuetterle

E.on Energy Trading ( email )

Düsseldorf
Germany

Manuel Wittke

Deloitte & Touche - Financial Risk Solutions ( email )

Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
88
Abstract Views
717
rank
292,730
PlumX Metrics