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Pricing CMS spreads in the Libor market model

Please always quote using this URN:urn:nbn:de:0296-matheon-5432
  • We present two approximation methods for pricing of CMS spread options in Libor market models. Both approaches are based on approximating the underlying swap rates with lognormal processes under suitable measures. The first method is derived straightforwardly from the Libor market model. The second one uses a convexity adjustment technique under a linear swap model assumption. A numerical study demonstrates that both methods provide satisfactory approximations of spread option prices and can be used for calibration of a Libor market model to the CMS spread option market.

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Metadaten
Author:Denis Belomestny, Anastasia Kolodko, John Schoenmakers
URN:urn:nbn:de:0296-matheon-5432
Referee:Peter Imkeller
Document Type:Preprint, Research Center Matheon
Language:English
Date of first Publication:2009/01/20
Release Date:2009/01/19
Institute:Weierstraß-Institut für Angewandte Analysis und Stochastik (WIAS)
Preprint Number:537
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