2010•Wilmott JournalRequires access

Swaptions in Libor Market Model with local volatility

Marc Henrard

Abstract

Abstract The Libor Market Model (LMM) describes the evolution of a yield curve through equations for a discrete set of forward rates. In the original version, the rate dynamic was log‐normal. The rate dynamic has been extended. The main result presented here is a generic approximation that provides an explicit European swaptions price for local volatilities LMM. The approximation is based on an initial freeze approximation very efficient in the Bond Market Model and an original corrector‐type approach. The approximation is strike dependent, allowing a smile calibration. The approximation efficiency is analyzed in details in the displaced diffusion case by comparison to precise Monte Carlo simulations. Copyright © 2010 Wilmott Magazine Ltd.

About this research paper

What this paper is about

Why it matters

OpenAlex reports 10 citations for this work. Citation counts describe recorded attention and do not establish research quality.

Key contribution

A contribution statement is not available in the OpenAlex record.

Method / approach

Method details are not available in the OpenAlex metadata.

Main findings

Findings are not separately available in the OpenAlex metadata.

Limitations

Limitations are not available in the OpenAlex metadata.

Applications

Application details are not available in the OpenAlex metadata.

Available abstract

Key concepts: LIBOR market model, Libor, Local volatility, Forward rate, Yield curve, Volatility (finance), Monte Carlo method, Econometrics