Premium
Currency‐Protected Swaps and Swaptions with Nonzero Spreads in a Multicurrency LMM
Author(s) -
Chang JuiJane,
Chen SonNan,
Wu TingPin
Publication year - 2013
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21567
Subject(s) - libor market model , libor , interest rate swap , currency , swap (finance) , financial economics , economics , interest rate derivative , business , econometrics , monetary economics , finance , interest rate , volatility (finance)
Despite the fact that currency‐protected swaps and swaptions are widely traded in the marketplace, pricing models for zero‐spread swaps, and swaptions have rarely been examined in the extant literature. This study presents a multicurrency LIBOR market model and uses it to derive pricing formulas for currency‐protected swaps and swaptions with nonzero spreads. The resulting pricing formulas are shown to be feasible and tractable for practical implementation and their hedging strategies are also provided. Our pricing formulas provide prices close to those computed from Monte Carlo simulation, but involve far less computation time, and thereby offering almost instant price quotes to clients and daily marking‐to‐market trading books, and facilitating efficient risk management of trading positions.