SABR Smiles for RFR Caplets
19 Pages Posted: 14 Apr 2020 Last revised: 14 Aug 2020
Date Written: April 3, 2020
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
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