Options on Normal Underlyings with an Application to the Pricing of Survivor Swaptions

Pensions Institute Discussion Paper PI-0713

29 Pages Posted: 10 Feb 2009

See all articles by Paul Dawson

Paul Dawson

Kent State University

Kevin Dowd

Nottingham University Business School (NUBS)

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics

David P. Blake

City, University of London

Date Written: Ocotber 15, 2008

Abstract

Survivor derivatives are gaining considerable attention in both the academic and practitioner communities. Early trading in such products has generally been confined to products with linear payoffs, both funded (bonds) and unfunded (swaps). History suggests that successful linear payoff derivatives are frequently followed by the development of option-based products. The random variable in the survivor swap pricing methodology developed by Dowd et al [2006] is (approximately) normally, rather than lognormally, distributed and thus a survivor swaption calls for an option pricing model in which the former distribution is incorporated. We derive such a model here, together with the Greeks and present a discussion of its application to the pricing of survivor swaptions.

Suggested Citation

Dawson, Paul and Dowd, Kevin and Cairns, Andrew J. G. and Blake, David P., Options on Normal Underlyings with an Application to the Pricing of Survivor Swaptions (Ocotber 15, 2008). Pensions Institute Discussion Paper PI-0713, Available at SSRN: https://ssrn.com/abstract=1340357 or http://dx.doi.org/10.2139/ssrn.1340357

Paul Dawson (Contact Author)

Kent State University ( email )

Kent, OH 44242
United States
330-672-1242 (Phone)

Kevin Dowd

Nottingham University Business School (NUBS) ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

David P. Blake

City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZX
Great Britain
+44 (0) 20-7040-8600 (Phone)
+44 (0) 20-7040-8881 (Fax)

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