Fast Calibration of Interest Rate Claims in the Quadratic Gaussian Model : 2 the Swaptions

29 Pages Posted: 30 Jul 2009

See all articles by Daniel Alexandre Bloch

Daniel Alexandre Bloch

Université Paris VI Pierre et Marie Curie

Date Written: July 27, 2009

Abstract

In the second 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 swaptions. Assuming the zero-coupon bond volatility to be a deterministic function of some Markov processes, we derive the true volatility of the coupon-bond as a weighted sum of some zero-coupon bond volatility with different maturities. Bounding the stochastic weights such that the misspecified volatility dominates the true one, we obtain bounds and hedges to the true price which are solved with approximate solutions of the Black type to the prices of call option and binary option when volatility, rates and dividends are function of the Markov processes.

Keywords: Swaption Pricing, Markov Processes, Malliavin Calculus, Quadratic Gaussian Models

Suggested Citation

Bloch, Daniel Alexandre, Fast Calibration of Interest Rate Claims in the Quadratic Gaussian Model : 2 the Swaptions (July 27, 2009). Available at SSRN: https://ssrn.com/abstract=1441187 or http://dx.doi.org/10.2139/ssrn.1441187

Daniel Alexandre Bloch (Contact Author)

Université Paris VI Pierre et Marie Curie ( email )

175 Rue du Chevaleret
Paris, 75013
France

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