Fast Calibration of Interest Rate Claims in the Quadratic Gaussian Model: 1 The Caplets
47 Pages Posted: 18 Mar 2009
Date Written: March 17, 2009
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
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