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.

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.

• Item Type: MPRA Paper
• Institution: Bank for International Settlements
• Language: English
• Keywords: CMS swap; LLM model; HJM model; one factor; approximation
• Subjects: G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63 - Computational Techniques ; Simulation Modeling; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects

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