SABR Smiles for RFR Caplets

19 Pages Posted: 14 Apr 2020 Last revised: 14 Aug 2020

See all articles by Sander Willems

Sander Willems

Ecole Polytechnique Fédérale de Lausanne

Date Written: April 3, 2020

Abstract

We present a natural extension of the SABR model to price both backward and forward-looking RFR caplets in a post-Libor world. Forward-looking RFR caplets can be priced using the market standard approximations of Hagan et al. (2002). We provide closed-form effective SABR parameters for pricing backward-looking RFR caplets. These results are useful for smile interpolation and for analyzing backward and forward-looking smiles in normalized units.

Keywords: RFR, IBOR Replacement, Interest Rate Cap Floor, SABR

Suggested Citation

Willems, Sander, SABR Smiles for RFR Caplets (April 3, 2020). Available at SSRN: https://ssrn.com/abstract=3567655 or http://dx.doi.org/10.2139/ssrn.3567655

Sander Willems (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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