Approximate Option Pricing in the L\'evy Libor Model
In this paper we consider the pricing of options on interest rates such as caplets and swaptions in the L\'evy Libor model developed by Eberlein and \"Ozkan (2005). This model is an extension to L\'evy driving processes of the classical log-normal Libor market model (LMM) driven by a Brownian motion. Option pricing is significantly less tractable in this model than in the LMM due to the appearance of stochastic terms in the jump part of the driving process when performing the measure changes which are standard in pricing of interest rate derivatives. To obtain explicit approximation for option prices, we propose to treat a given L\'evy Libor model as a suitable perturbation of the log-normal LMM. The method is inspired by recent works by Cern\'y, Denkl and Kallsen (2013) and M\'enass\'e and Tankov (2015). The approximate option prices in the L\'evy Libor model are given as the corresponding LMM prices plus correction terms which depend on the characteristics of the underlying L\'evy process and some additional terms obtained from the LMM model.
Code (0)
등록된 구현이 없습니다.
Similar Papers 제목 키워드 기반
Pricing Exchange Rate Options and Quanto Caps in the Cross-Currency Random Field LIBOR Market Model
We develop an arbitrage-free random field LIBOR market model to price cross-currency derivatives. The uncertainty of the forward LIBOR rates of our cross-currency model is driven by a two time parameter random field inst…
Deep Learning-Based BSDE Solver for Libor Market Model with Application to Bermudan Swaption Pricing and Hedging
The Libor market model is a mainstay term structure model of interest rates for derivatives pricing, especially for Bermudan swaptions, and other exotic Libor callable derivatives. For numerical implementation the pricin…
Semi-analytical pricing of options written on SOFR futures
In this paper, we propose a semi-analytical approach to pricing options on SOFR futures where the underlying SOFR follows a time-dependent CEV model. By definition, these options change their type at the beginning of the…
Analytic RFR Option Pricing with Smile and Skew
We extend the short rate model of Turfus and Romero-Berm\'udez [2021] to facilitate accurate arbitrage-free analytic pricing of SOFR, SONIA or ESTR caplets, i.e. options on backward-looking compounded rates payments, in …
SABR/LIBOR market models: pricing and calibration for some interest rate derivatives
In order to overcome the drawbacks of assuming deterministic volatility coefficients in the standard LIBOR market models to capture volatility smiles and skews in real markets, several extensions of LIBOR models to incor…