Fast Calibration of Interest Rate Claims in the Quadratic Gaussian Model: 1 The Caplets

47 Pages Posted: 18 Mar 2009

See all articles by Daniel Alexandre Bloch

Daniel Alexandre Bloch

Université Paris VI Pierre et Marie Curie

Samson Assefa

affiliation not provided to SSRN

Date Written: March 17, 2009

Abstract

As a first part of a series of articles on the pricing of interest rate contingent claims in the multifactor Quadratic Gaussian model, we concentrate on the pricing of caps and floors leaving the pricing of swaptions and multi-currency claims to a latter stage. Using an efficient way of computing the zero-coupon bond prices, we derive under the forward measure an approximate solution of the Black type to the price of call options. We then derive the Greeks of the model, which will be used for the risk management of the exotic products, as well as an approximation to the implied volatility surface induced by the model. To conclude, we detail the approximated call price in the two-factor Quadratic Gaussian model.

Keywords: Multi-factor Quadratic Gaussian model, Caps and Swaptions price, Malliavin calculus

Suggested Citation

Bloch, Daniel Alexandre and Assefa, Samson, Fast Calibration of Interest Rate Claims in the Quadratic Gaussian Model: 1 The Caplets (March 17, 2009). Available at SSRN: https://ssrn.com/abstract=1361609 or http://dx.doi.org/10.2139/ssrn.1361609

Daniel Alexandre Bloch (Contact Author)

Université Paris VI Pierre et Marie Curie ( email )

175 Rue du Chevaleret
Paris, 75013
France

Samson Assefa

affiliation not provided to SSRN ( email )

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