The Co-Initial Swap Market Model

Abstract

In this paper, we introduce a novel approach to the pricing and the risk management of generic European style interest-rate derivatives. This new model has great flexibility and has the advantage of avoiding complex model calibration techniques typical of standard short-rate models. Dynamics is assigned on a set of co-initial forward swap rates, and arbitrage-free restrictions are determined in a normal and lognormal setup. Model implementation and calibration are discussed, and details of two example applications are also presented.