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CMS swaps in separable one-factor Gaussian LLM and HJM model

Henrard, Marc (2007): CMS swaps in separable one-factor Gaussian LLM and HJM model.

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Abstract

An approximation approach to Constant Maturity Swaps (CMS) pricing in the separable one-factor Gaussian LLM and HJM models is presented. The approximation used is a Taylor expansion on the swap rate as a function of a random variable which is intuitively similar to a (short) rate. This approach is different from the standard approach in CMS where the discounting is written as a function of the swap rate. The approximation is very efficient.

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