19 Pages Posted: 8 May 2009
Date Written: May 3, 2009
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: Suggested Citation