Fast and Accurate Pricing and Hedging of Long-Dated CMS Spread Options
26 Pages Posted: 11 Dec 2009
Date Written: December 8, 2009
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: Suggested Citation