Skewed Libor Market Model and Gaussian HJM Explicit Approaches to Rolled Deposit Options

16 Pages Posted: 14 Jan 2007

See all articles by Marc P. A. Henrard

Marc P. A. Henrard

muRisQ Advisory; OpenGamma; University College London - Department of Mathematics

Multiple version iconThere are 2 versions of this paper

Date Written: January 2006

Abstract

A simple exotic option (floor on rolled deposit) is studied in the shifted log-normal Libor Market (LMM) and Gaussian HJM models. The shifted log-normal LMM exhibits a controllable volatility skew. An explicit approach is used for both models. Using approximations the price in the LMM is obtained without Monte Carlo simulation. The more precise approximation uses a twisted version of the perdictor-corrector adapted to explicit solutions. The results of the approximation are surprisingly good.

Keywords: Libor Market Model, Heath-Jarrow-Morton, skew, smile, explicit solution, approximation, Bond Market Model, option on composition, existence results

JEL Classification: G13, E43, C63

Suggested Citation

Henrard, Marc P. A., Skewed Libor Market Model and Gaussian HJM Explicit Approaches to Rolled Deposit Options (January 2006). Available at SSRN: https://ssrn.com/abstract=956849 or http://dx.doi.org/10.2139/ssrn.956849

Marc P. A. Henrard (Contact Author)

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