Fast and Accurate Pricing and Hedging of Long-Dated CMS Spread Options

26 Pages Posted: 11 Dec 2009

See all articles by Mark S. Joshi

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies (deceased)

Chao Yang

Origin Energy

Date Written: December 8, 2009

Abstract

We present a fast method to price and hedge CMS spread options in the displaced-diffusion co-initial swap market model. Numerical tests demonstrate that we are able to obtain sufficiently accurate prices and Greeks with computational times measured in milliseconds. Further, we find that CMS spread options are weakly dependent on the at-the-money Black implied volatility skews.

Keywords: Spread option, Gaussian quadrature rule, Delta, Vega, Market skew sensitivity

JEL Classification: G13

Suggested Citation

Joshi, Mark and Yang, Chao, Fast and Accurate Pricing and Hedging of Long-Dated CMS Spread Options (December 8, 2009). Available at SSRN: https://ssrn.com/abstract=1520775 or http://dx.doi.org/10.2139/ssrn.1520775

Mark Joshi (Contact Author)

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

Melbourne, 3010
Australia

Chao Yang

Origin Energy ( email )

Sydney
Australia

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