Vega Control

19 Pages Posted: 8 May 2009

See all articles by Nick Denson

Nick Denson

University of Melbourne - Centre for Actuarial Studies

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies (deceased)

Date Written: May 3, 2009

Abstract

The calculation of prices and sensitivities of exotic interest rate derivatives in the LIBOR market model is often very time consuming. One approach that has been previously suggested is to use a Markov-functional model as a control variate for prices and deltas but not vegas. We present a new approach that is effective for prices, deltas and vegas. It achieves a standard error reduction by a factor of 10 for the price of a five-factor, twenty-year Bermudan swaption, and of 5 for its vega.

Keywords: Variance reduction, control variate, LIBOR market model, LMM, BGM, Markov-functional model, vega

JEL Classification: G13

Suggested Citation

Denson, Nick and Joshi, Mark, Vega Control (May 3, 2009). Available at SSRN: https://ssrn.com/abstract=1398523 or http://dx.doi.org/10.2139/ssrn.1398523

Nick Denson (Contact Author)

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne
Australia

Mark Joshi

University of Melbourne - Centre for Actuarial Studies (deceased) ( email )

Melbourne, 3010
Australia

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